Empirical macro models for developing countries : the case of Latin America
The study treats Latin American countries as one regional economy by aggregating data of individual countries. Principles of aggregating data of individual countries for different types of variables are laid out and the generated data is laid out in terms of an accounting framework. Data series are also projected up to 2000 to provide a long track of 29 years for simulations which follow later. Original econometric work consists in estimating equations for export volume and prices, which is very much in the tradition of global modelling, and modelling aggregate investment for the region. A prototype full macro model is assembled for the Latin American region by using own work and also adopting econometric contributions from others. First, partial model simulations are performed to understand the underlying structural features. Aggregate demand block is simulated to reveal the size, plausibility and time pattern of Keynesian multipliers. This reveals a multiplier of 1.6 and a 11 year cycle generated by the multiplier-accelerator process. Aggregate supply bloc is simulated to exhibit the nature of supply response which shows that supply elasticity with respect to real exchange rate is about .2 and it is unkeynesian in the sense that there is little scope for action by inflationary surprises. Trade bloc is simulated to check whether Marshall-Lerner conditions are satisfied. Current account balance does improve upon devaluation with an elasticity of 2, but once prices and output are endogenized very soon the improvements are lost. Then, full model simulations are conducted in open loop mode to study the response of the regional economy to both external and internal shocks. These simulations show sensible and stable outcomes. Finally the Latin American model is simulated in `closed loop mode' to illustrate the use of the model built for policy analysis. Fiscal and exchange rate policy choices in the face of a negative external shock are investigated. The policy seeks to correct external imbalance. A qualified conclusion is drawn that expenditure cutting works as desired but exchange rate policy sets up severe cycle in current account balance.