An analysis of the asymmetric responses of the external sector to economic growth

In anticipation of positive growth rates for the Greek economy for the coming year, this paper focuses on the extent to which such a development is expected to lead again to trade deficit problems. In fact, drawing conclusions from past experience, it is important to distinguish between different categories of imports which are expected to burden the trade balance. Thus, if the increase comes mostly from intermediate and capital goods, the resulting trade account deficit will most likely be reversible in the long run. If, however, the increase in imports comes primarily from consumption goods, the Greek economy will return to similar external imbalances present before the crisis. The impact on the various categories of imports from the long anticipated economic expansion depends on the size of income elasticities for each of these categories. We have, therefore, disaggregated import data from the Bank of Greece, Eurostat, and the Greek Statistics Authority for the years of 2000-2017 into three categories of goods: consumption, intermediate and capital. We estimate three import demand functions, one for each category and an aggregate export demand function to account for the import component and show the additional burden on the trade balance from a potential increase in exports. For the purpose of estimation we used a Bai-Perron (2003) methodology. Our findings suggest that the income elasticity of imported consumption goods is the highest of the three, generating a number of concerns regarding the long-run impact of growth on the trade deficit, given that the estimates reveal that the Greek exports are burdened by a substantial import component. We also find an asymmetric response of imports to changes in income in two of the three categories of goods. Specifically, the size of the income elasticity of demand for imported consumption and intermediate goods declines during recessions and increases during expansions. This result creates important policy implications. It makes economic reforms that will stimulate exports and foreign direct investment even more necessary. Increased production in tradable goods sectors and foreign direct investment (FDI) are the only ways to finance external deficits and grow without these deficits in the long run.