Dynamic Paths of Economic Openness Experiments in Latin America: A Small Intertemporal CGE Model

What might be the dynamic consequences of abrupt economic openness policies under a fixed exchange rate regime for a “typical” Latin American country? In this essay, I specify, calibrate and simulate a small dynamic intertemporal computable general equilibrium model to explore some scenarios related to the implementation of that type of policies. In Section 1, I review the main characteristics of a “typical” Latin American economy in terms of production structure, consumption and saving behavior, and fiscal and balance of trade features. In Section 2, I build a small intertemporal CGE with a forward-looking modem investment sector as its “dynamic core”. In Section 3 I present the model parameterization and a base case solution. In Section 4 I perform some computational policy experiments, showing how abrupt economic openness under a fixed exchange rate regime and anticipated foreign lending constraints may result, if overall productivity gains do not materialize in time, in a short-term investment boom followed by an exchange rate regime crisis. Finally, in Section 5 I present some concluding remarks.