Modeling Country Risk and Capital Flows in GTAP

This paper describes how the standard GTAP framework may be used to assess the short-run impacts of changes in international capital market conditions. It describes a technique that can be used to examine the short-run effects of changes in country risk. In the standard GTAP model investment demand is spread across regions according to a simple rate-of-return-equalizing rule. By making the risk premium in this rule explicit, we are able to examine the effects of changes in these risk premium. This work was originally developed as part of the course material for the South African GTAP short course in January 1998. South Africa has experienced a series of dramatic changes during the last decade, and these have had very significant effects on the capital account. Thus, this paper also contains an application of the technique developed to the recent South African experience, and an assessment of how well the simulated changes in this application match actual outcomes. Technical Paper Number 13 can be downloaded in PDF format. To print this you will need the Adobe Acrobat Reader. Replication of the results in this technical paper may be readily accomplished using the latest version of the RunGTAP software. For those interested in further analysis of the implications of the capital inflow for the South African economy, as well as for the rest of Southern Africa, please download this file in MS Word format.