Are exports and imports cointegrated? Evidence from two Pacific Island countries

The aim of this paper is to investigate whether there is long-run relationship between exports and imports for two Pacific Island Countries -- Fiji and Papua New Guinea (PNG). This is an important issue because long-run convergence will ensure that trade imbalances are sustainable. We explore this issue using the bounds-testing approach to cointegration and find that while exports and imports for Fiji and PNG are indeed cointegrated, the coefficient on exports is unity only in the case of Fiji. These results imply that Fiji satisfies the strong form of its intertemporal budget constraint while PNG satisfies only the weak form of its intertemporal budget constraint.<br />