CARIFORUM and UK EPA Study

function gives the joint probability of events, conditional on any parameter of interest be it exports, wages, income, poverty or the amount of services that can be generated; that is, the probability that the data is useful, given the parameter of interest, p (D|θ). The Bayesian model has been pervasively used for similar and unrelated empirical challenges (see Bayarri and Berger (2004) and Zyphur and Oswald (2012)). Empirical Findings from Bayesian Analysis We use Bayesian VAR to make the following projections about innovations or disturbances to macro-economic variables in the region 71 : (iii) Shocks to product diversification has long-term consequences for trade liberalization or openness. The negative effects could last for more than 5 years (see Appendix A1) (iv) The trade weighted values of local currencies respond controversially to product diversification shocks. The appreciation of the trade weighted value of the currencies can persistently create lack of competitiveness when there is a positive diversification shock (see Appendix A2). This may partly account for trade deficits as imports become comparatively cheaper. (v) The response of the growth of the labor force to product diversification shock could remain flat for about 2 years, but it will slowly decline over time (see Appendix A3) (vi) Prices immediately rise to higher levels as a result of product diversification shock, but eventually fall after about 2 years (see Appendix A 4) (vii) The relationship between capital formation and trade is very critical for the region. Average volume of trade responds adversely to shocks that emanate from capital formation (see Appendix A5). (viii) Capital formation in the region depends on trade liberalization or openness. A shock to trade liberalization affects the region on impact, but the shock perversely dissipates over a longer period (see Appendix A6)

71 The shocks are Cholesky one standard deviation innovations

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