Poland–USA sectoral trade balances: regime shifts and the nonlinear impact of currency fluctuations

Abstract

Purpose The Polish economy has undergone major challenges and changes over the past few decades. The country's trade flows, in particular, have become more firmly tied to the country’s Western neighbors as they have grown in volume. This study examines Poland's trade balances in ten Standard International Trade Classification (SITC) sectors versus the United States of America, first testing for and isolating structural breaks in each time series. These breaks are then included in a set of the cointegration models to examine their macroeconomic determinants. Design/methodology/approach Linear and nonlinear and nonlinear autoregressive distributed lag models, both with and without dummies corresponding to structural breaks, are estimated. Findings One key finding is that incorporating these breaks reduces the significance of the real exchange rate in the model, supporting the hypothesis that this variable already incorporates important information. It also results in weaker evidence for cointegration of all variables in certain sectors. Research limitations/implications This study looks only at one pair of countries, without any third-country effects. Originality/value An important country pair's trade relations is examined; in addition, the real exchange rate is shown to incorporate economic information that results in structural changes in the economy. The paper extends the existing literature by conducting an analysis of Poland's trade balances with the USA, which have not been studied in such a context so far. A strong point is a broad methodology that lets compare the results the authors obtained with different kinds of models, both linear and nonlinear ones, with and without structural breaks.