An Empirical Test of the J-curve for Estonia, Latvia, and Lithuania and Policy Implications

This paper studies the J-curve for the bilateral trade between Estonia, Latvia, Lithuania and the U.S. The vector-error correction model and the impulse response function are applied in empirical work. The J-curve is empirically confirmed for Estonia but not substantiated for Latvia and Lithuania. After a shock to real depreciation, the trade balance deteriorates for Estonia in the second quarter and improves afterward, deteriorates continually for Latvia, and improves continually for Lithuania. Hence, there is no common pattern found for these three countries.