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External shocks, adjustment policies, and investment : illustrations from a forward-looking CGE model of the Philippines

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  • Go, Delfin S.

Abstract

This paper presents a model that integrates intertemporal and forward-looking behavior in investment and consumption decisions in a multisectoral general equilibrium framework applicable to developing countries. It formulates and uses an infinite-horizon growth model to examine the adjustment, growth, and debt problems of a middle-income country, which the author illustrates using data for the Philippines. The author concludes that the expectation is a key factor. Contrary to the common suggestion that an economy should adjust and contract in response to a permanent import price shock, the behavior suggested in a model with rational expectations in investment decisions is that the opposite can be true. Combined with other policies, tariff reform could rechannel investment and resources toward the more tradable sectors and exports can be emphasized and increased. If domestic resources are also mobilized through increased tax collection, the combined effect will be to reduce or slow the accumulation of foreign debt. In other words, middle-income countries like the Philippines missed a golden opportunity for policy reform in the 1970s and found it harder to implement adjustment policies under less favorable circumstances in the 1980s.

Suggested Citation

  • Go, Delfin S., 1991. "External shocks, adjustment policies, and investment : illustrations from a forward-looking CGE model of the Philippines," Policy Research Working Paper Series 737, The World Bank.
    • Handle: RePEc:wbk:wbrwps:737
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    References listed on IDEAS

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    6. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 38(3), pages 265-296, April.
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    Cited by:

    1. Lensink, Robert, 1995. "Foreign exchange constraints and developing countries," Economic Modelling, Elsevier, vol. 12(2), pages 179-191, April.
    2. Elshennawy, Abeer & Robinson, Sherman & Willenbockel, Dirk, 2016. "Climate change and economic growth: An intertemporal general equilibrium analysis for Egypt," Economic Modelling, Elsevier, vol. 52(PB), pages 681-689.
    3. Vaqar Ahmed & Cathal O'Donoghue, 2010. "External Shocks in a Small Open Economy: A CGE - Microsimulation Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(1), pages 45-90, Jan-Jun.
    4. Elshennawy, Abeer, 2013. "The Euro-Mediterranean free trade agreement and the cost of tariff liberalization in Egypt," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 326-338.
    5. Keogh-Brown, Marcus & McDonald, Scott & Edmunds, W. John & Beutels, Philippe & Smith, Richard D., 2008. "The macroeconomic costs of a global influenza pandemic," Conference papers 331699, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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