Productivity spillovers through trade integration in Central America

This study investigates how trade integration shapes the transmission of productivity shocks across Central America, addressing a critical gap in the understanding of spillovers in a deeply integrated region. Existing literature confirms the existence of spillovers in the region but offers limited evidence on their transmission mechanisms. Using a computable general equilibrium model in which trade relationships are represented through gravity equations, we simulate country-specific total-factor-productivity shocks and trace their macroeconomic impacts. Our results show that countries that are more integrated gain more from positive productivity shocks, regardless of whether the shock originates within the country or among its trade partners, with low-income economies benefiting the most. Additionally, countries present higher productivity-fueled economic growth when they trade compared to when their economies are closed. These findings highlight how trade integration amplifies productivity-driven growth and clarify the synergy between productivity gains and regional trade.