Modelling trade and financial liberalisation effects for Argentina

Abstract

This thesis is a response to the growing recognition that the workings of the financial sphere significantly affect the value of social production, its distribution, and the magnitude of income poverty. The thesis extends a general equilibrium single-country model targeted to a developing economy (the IFPRI Standard Model) to account for the workings of the financial sphere and 'money in the production function', in the tradition begun by Milton Friedman (1969). The models are calibrated and their workings are analysed. It is found that the inclusion of 'money in the production function' by itself only causes financial outcomes to significantly affect the overall level of production and the unemployment rate in the presence of strong wage rigidities. This is explained in terms of the model parameters. The extended model is employed in a stylised static way to identify the short-run stresses generated by current and capital account liberalisation in Argentina during its Currency Board Regime, adopted over 1991-2001, with the finding that in the short-run the volatility of capital flows was transmitted to employment and activity levels. The model is then linked in a sequential way to a behavioural microsimulations model, separating out the different transmission channels involved. It is found that the significant capital outflows witnessed by the country surrounding the end of its Currency Board Regime worsened poverty and inequality indicators in the country, and that the main transmission channel through which the capital outflow had the most distributional impact was the selectivity of labour market rationing.