How OECD policies affected Latin
            America in the 1980s
The authors assess the effects of OECD
            monetary and fiscal policies on Latin America by means of
            simulation studies using the LBS/NIESR Global Econometric
            Model and a new empirical model of Latin America. The Latin
            American model pays special attention to the supply-side
            determination of natural rate of output and to the effects
            of asset accumulation. The Latin American model and its
            properties are presented by both empirical simulations and
            by means of a simple analytical representation. This model
            of Latin America is used in conjunction with the Global
            Econometric Model to study the macroeconomic interactions
            between Latin America and the rest of the world. The
            assumption in policy simulations is that G-3 exchange rates
            are forward-looking while Latin America pegs its currency to
            the U.S. dollar. It is postulated that Latin American fiscal
            policy adjustments target a baseline current account
            balance, in the face of external shocks. The simulation
            results reflect a number of important international links,
            which can be quantified as multiplier properties of the
            linked system of models. A permanent 5 percent contraction
            in the U.S. money supply induces a contraction of about the
            same order in Latin American GDP and capital stock. This is
            caused by higher U.S. interest rates and diminished Latin
            American competitiveness in third markets, reinforcing the
            fall in U.S. demand. Similarly, a combined monetary
            contraction in G-3 countries on a permanent footing - a
            contraction like the one in 1978-80 (U.S., 5.2 percent,
            German, 11.9 percent, and Japanese, 1.7 percent) hurts Latin
            America. Latin American GDP remains depressed by 4 percent
            and capital stock by 5 percent even after 10 years. The
            effects of negative income and interest rates emanating from
            G-3 countries are mutually reinforcing. U.S. fiscal
            expansion equal to 1 percent of baseline GDP, sustained over
            five years, transmits negatively to Latin America, where GDP
            falls 0.6 percent in the short run and remains depressed by
            0.3 percent even after 10 years. The negative effects of
            higher interest rates and diminished competitiveness
            dominate the positive effects (which are short-lived) of
            expanded U.S. demand for Latin American exports. Similarly,
            G-3 fiscal spending shocks, which are gradually built up
            over five years, then reversed the next two years, have a
            mild negative effect on Latin American GDP. The G-3 fiscal
            shocks administered were set to their actual magnitudes
            relative to baseline GDP, as observed in 1980-85 (U.S.
            expansion of 3.5 percent but contraction in German and
            Japanese spending of 4.4 percent and 3.5 percent,
            respectively). Latin American GDP is lower than baseline GDP
            by 0.5 percent when the shocks peak at the end of five
            years, but continues to remain depressed 0.3 percent by the
            end of 10 years. The simulated effects of G-3 monetary and
            fiscal policies, with the shocks constructed to reflect
            their actual sizes in the early 1980s, suggest that Latin
            America's adjustment problems in that period cannot be
            attributed to G-3 fiscal imbalances that arose because of
            failures of G-3 fiscal policy coordination. But concerted
            G-3 monetary contraction in response to the second oil shock
            imposed heavy costs on Latin America; without it, Latin
            American GDP would have been 5 percent higher in the 1980s.