The Effects of DR-CAFTA in Nicaragua: A CGE-Microsimulation Model for Poverty and Inequality Analysis

In this paper, we build a Computable General Equilibrium (CGE)-microsimulation model for the economy of Nicaragua, following the Top-Down approach (see Bourguignon et al., 2003), that is, the reform is simulated first at the macro level with the CGE model, and then it is passed onto the microsimulation model through a vector of changes in some chosen variables, such as prices, wage rates, and unemployment levels. The main reason for this choice is that with such an approach, one can develop the two models (CGE and microsimulation) separately, thus being able to make use of behavioural microeconometric equations, which are instead of more difficult introduction into a fully integrated model. Moreover, the so called top-down approach appears to be particularly suited to the policy reform we are willing to simulate with the model: the Free Trade Agreement of Central America with the USA is mainly a macroeconomic reform, which on the other hand can have important effects on the distribution of income. With such a model we try to study the possible changes in the distribution of income deriving from the Free Trade Agreement with USA. Our analysis finds only small changes both in the main macroeconomic variables and in the distribution of income and poverty indices.