On the persistence of unemployment in small open economies

The paper attempts to measure the persistence of labour market distortions in general and unemployment in particular to structural shocks 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 domestic shocks are the main sources of labour market fluctuations in the flexible exchange rate countries. In the fixed exchange rate countries, labour market fluctuations are mainly due to supply shocks. The latter result is similar to those supply responses observed in industrialized countries.