How Might CAFTA Change Macroeconomic ﬂuctuations in Central America? Lessons From NAFTA
32 Pages Posted: 28 Oct 2019
Date Written: December 31, 2004
This paper examines the potential impact of theCentral America Free Trade Agreement (CAFTA) on macroeconomic ﬂuctuations in Central America in light of Mexico’s NAFTA experience. CAFTA and NAFTA share a number of common characteristics as both agreements envisage comprehensive tariff reductions, cover a broad spectrum of sectors, and include provisions about settlement of disputes. NAFTA helped spur a dramatic increase in trade and ﬁnancial ﬂows between the member countries and was associated with signiﬁcant changes in the Mexican business cycles. The ﬁndings in this paper suggest that CAFTA could also result in similar effects. In particular, CAFTA could boost trade and ﬁnancial ﬂows between the United States and the Central American countries. The agreement also could play a major role in reducing the volatility of business cycle ﬂuctuations in the region and could lead to an increase in the degree of co-movement of business cycles in the Central American economies and the United States.
Keywords: Macroeconomic ﬂuctuations, Regional integration, Volatility, NAFTA, CAFTA
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