A Forecasting Model for Economic Policy in Barbados

The forecasts in my paper The Barbados Economy: The Road to Prosperity are based on an empirical model of an export-driven economy, where the source of growth is increased productivity and competitiveness in tourism, other traded services and exports. Foreign exchange inflows and incoming investment generate multiplier effects on domestic production and incomes, which in turn increase the demand for imports, paid for out of the foreign exchange earnings and capital inflows. To avert balance of payments crises, government must avoid creating money to fuel domestic spending and imports for which there is no additional foreign finance. To grow the economy there must be investment in productivity increases to strengthen international competitiveness. This note provides the model, structured along these lines, on which the forecasts are based.

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