A Regional Computable General Equilibrium Model for Honduras: Modeling Exogenous Shocks and Policy Alternatives

Abstract

In this paper we develop a dynamic regional computable general equilibrium (CGE) model for Honduras that incorporates regional disaggregated sectors for agriculture. We undertook this research to address two pressing policy concerns in Honduras. First, what growth strategy should the country follow, given its severe balance of payments constraint and dependence on remittances and the price of oil? Second, what would be the impact on growth of investments in projects to increase agricultural productivity, given the importance of agriculture to the rural poor and to the Honduran economy? Our model extends previous modeling work on Honduras in several ways. First, it develops an updated regional social accounting matrix for 2008, coupled with an updated CGE model. Second, the CGE is a recursive, dynamic model that incorporates unemployment in the short run. We specify a fixed minimum wage and an informal sector and use a recursive, dynamic framework to solve for the short-run adjustment process that occurs as the economy responds to external shocks. Third, the model is regional, permitting us to examine the impact of sectoral development policies, particularly those focused on the agricultural sector.