An empirical examination of the trade balance in Sweden.

Abstract

This study examines the determinants of trade balance in Sweden in the context of a traditional model which includes the real effective exchange rate and domestic and foreign income levels. The econometric analysis indicates that the trade balance is found to be cointegrated with the other two variables and their relationship appears to be robust. A Vector Error Correction Model (VECM) analysis describes how the short term dynamics are linked to the long term relations, leading the cointegrating relationship to equilibrium. Finally, the study proves that there is no significant bilateral causality between the trade balance of Sweden and the real effective exchange rate.