Alternative Closures for an Open Economy Model in a Stock and Flow= Consistent Framework: The Case of Central America

Abstract

The main aim of this thesis is to test whether in Central American countries output adjustments are demand-led or supply-led, providing some theoretical insights on the relationship between low productivity and persistent external deficits. At this purpose, a fully-demand led Stock and Flow Consistent model of an open economy is combined with a supply-driven and/or a demand-driven closure. In a second stage, we derive a reduced form of the model, and use Time Varying Parameter technique and Granger Causality test to empirically assess which closure is more likely in the case of Central America in the period 1992-2014. The results show evidence of a supply driven closure for long-run movements and a joint closure demand-supply in the short-run, which reinforce the importance of the model’s closures and provide some insights on economic policy decisions.