On the persistence of unemployment in small open economies

The paper attempts to measure the persistent effects of structural shocks to labour market fluctuations, particularly unemployment in the period 1974-2010 in the context of two small open economies: Barbados with a fixed exchange rate regime and Trinidad and Tobago with a flexible exchange rate regime. Using a rational expectations model and performing parameterizations and simulations for the two countries, the paper finds that external and supply shocks are the main sources of unemployment or labour market fluctuations in fixed exchange rate countries. In flexible exchange rate countries, the fluctuations are primarily attributed to world interest rate and domestic demand (monetary) shocks. JEL classification codes: J51,E24,C15