Abstract
In early January 2003, the United States and Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua launched official negotiations for the Central American Free Trade Agreement (CAFTA), a treaty that would expand NAFTA-style trade barrier reductions to Central America. With deeper trade integration between Central America and the United States, it is expected that there will be closer links in business cycles among Central America and the United States. The aim of this paper is to assess the degree of business cycle synchronization between Central America and the United States. We find a relatively low degree of business cycle synchronization within Central America as well as between Central America and the United States. We further expect that based on the current trade structure between Central America and the United States, business cycle synchronization with the United States is expected to increase only modestly with further trade expansion, making the coordination of macro policies within CAFTA somewhat less of a priority.
Highlights
In early January 2003, the United States and Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua launched official negotiations for the Central American Free Trade Agreement (CAFTA), a treaty that would expand NAFTA-style trade barrier reductions to Central America
With respect to the United States, business cycle synchronization is highest for Costa Rica, El Salvador and Honduras, at levels lower that those prevailing in member countries in NAFTA and MERCOSUR. 4
Business cycle sync hronization (BCS) within Central America is quite low compared to NAFTA and EU, but not when compared to MERCOSUR
Summary
In early January 2003, the United States and Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua launched official negotiations for the Central American Free Trade Agreement (CAFTA), a treaty that would expand NAFTA-style trade barrier reductions to Central America. Using state-of the art econometric techniques, we attempt to measure the degree of business cycle synchronization within Central America as well as with the United States, its main trading partner. We calculate measures of inter and intraregional trade for Central America and quantify the relationship between trade intensity, trade structure and business cycle synchronization and discuss how trade integration within CAFTA is likely to shape future business cycle patterns in the region.
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