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I would like to thank, without implication, Lawrence DeMilner, Lorenzo Pérez, Sharifa Ali-Abdullah, Charles Kramer, Sam Itam and the participants of a seminar held at the Ministry of Finance in Port-of-Spain, Trinidad for helpful discussions and comments.
The NAIRU was estimated following the method of Fallon and Verry (1988). Their approach consists in regressing the unemployment rate on the change in wage inflation and a vector of structural variables, and then calculating an unemployment rate consistent with constant inflation. In our example, the structural vector includes the terms of trade, the capital stock, real investment, the ratio of tax revenues to GDP and a strike variable accounting for union militancy.
The observation that national savings and investment are highly correlated is pervasive and commonly referred to as the “Feldstein-Horioka Puzzle”. It is sometimes taken as evidence for an incomplete integration of international capital markets (for a discussion see e.g. Obstfeld and Rogoff, 1996). Figure 6 suggests that Trinidad and Tobago could be described as an almost closed economy in terms of capital mobility, a fact that will be accounted for in the next section.
The number of firms can be computed by setting profits (10) equal zero. In equilibrium, all firms are symmetric, pi = p, and ci = Y/b. Therefore, the number of firms is b = Y/σf, where f is real fixed costs. Interestingly, b is procyclical, meaning that firms are created in an upturn and destroyed in a downturn.
For redistributive reasons, there are still some pay-as-you-go elements in the Chilean pension model. For institutional details, the reader is referred to Holzmann (1996).