A Practical Policy Model of the Small Open Economy, with Applications
Very small economies may achieve high levels of development, as evidenced by Iceland and Mauritius, notwithstanding the facts of their high import dependence, limited capacity for export diversification, open financial markets and susceptibility to external shocks. This paper explains how unorthodox fiscal and monetary policies may be employed to ensure stability and maintain competitiveness and growth in the face of oil price shocks, the impact of natural disasters, capital flight and contraction in foreign investment, in countries characterised by this economic structure.