Trade between Euro zone and Arab countries: a panel study

Abstract

We construct an aggregate data panel to estimate price and income elasticities of the Arab countries imports from and exports to Euro zone. We study the nonstationarity of our series and verify the cointegration hypothesis among the variables using Pedroni's (2004 Pedroni, P. 2004. Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20: 597–627. [Crossref], [Web of Science ®] , [Google Scholar]) heterogeneous panel cointegration tests. The panel data circumvent the problem of short span sample and increase the power of the nonstationarity tests. Then, we estimate the idiosyncratic and panel cointegrating vectors using dynamic ordinary least squares (DOLS) (Kao and Chiang, 2000 Kao, C and Chiang, M. 2000. On the estimation and inference of a cointegrated regression in panel data. Advances in Econometrics, 15: 179–222. [Crossref] , [Google Scholar]), fully modified ordinary least squares (FMOLS) (Phillips and Hansen, 1990) and group mean DOLS and FMOLS developed by Pedroni (2000 Pedroni, P. 2000. Fully modified OLS for heterogeneous cointegrated panels. Advances in Econometrics, 15: 93–130. [Crossref] , [Google Scholar], 2001 Pedroni, P. 2001. Purchasing power parity tests in cointegrated panels. The Review of Economics and Statistics, 83: 727–31. [Crossref], [Web of Science ®] , [Google Scholar]). Our variables are shown to be cointegrated. Arab imports from Euro zone countries are income inelastic, but price elastic. Results of export function are not conclusive and depend on the used estimator.

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