Productivity Spillovers through Trade Integration in Central America

Central America is a highly trade-integrated region. However, there has been little analysis of the effects such integration has had on macroeconomic aggregates. This study explores how spillovers from country-specific productivity shocks would spread across the countries that comprise the region. To do so, it employs a computable general equilibrium model calibrated to replicate the bilateral trade relationships within the region. As expected, the results show that countries that are more integrated within it would benefit more from idiosyncratic positive productivity shocks. In addition, the analysis enables the identification of spillovers across countries through the trade channel and estimates the beneficial effect of economic integration on economic growth compared to that of autarky.