Macroeconomic Adjustment and Foreign Trade of Centrally Planned Economies

Abstract

This empirical study stresses the underlying macroeconomic forces which determine foreign trade flows in CPEs. The general specification includes a planners' demand equation for the volume of imports, a planners' supply equation for the volume of exports, and a rest-of-world demand equation for the export price level. The planners' behavioural equations include variables for activity levels, trade balance constraints, prices, and domestic excess demand. The import price is exogenous. This simultaneous equation model is estimated on annual data from the mid-1950s to the mid-1970s, for Czechoslovakia, the GDR, Hungary, and Poland. Maximum likelihood estimation in a nested hypothesis testing framework allows selection of restricted versions of the general model for each country. Estimated price elasticities accord with the underlying theory, and the excess demand variables perform well.