2013: There is sufficient evidence from the existing literature to support the view that small states are different: they are more open, they are forced by their limited resources to be specialised in a few internationally competitive products and services, and they therefore do not have the option of adopting more of a closed economy strategy in pursuit of economic growth. Small states have outperformed large states, but only when they pursued strategies appropriate to their circumstances. The strategies for stabilisation and growth that work for large economies do not suit the circumstances of small economies, and if applied as in large countries, they invariably result in policy failure. In particular, the record shows that economic growth in the small open economy depends on increasing quality and productivity, and is unaffected by changes in relative prices. This paper surveys the literature with a view to gaining insights into monetary and exchange policies that are best for small economies.
2013: In their 2010 IMF policy paper, Blanchard, Dell’Ariccia and Mauro observed that central banks of smaller economies were well advised to manage their exchange rates, as well as to contain inflation. They admitted that many countries did in fact pursue both inflation and exchange rate objectives. The present paper takes this argument one step further, demonstrating that the management of aggregate demand, using fiscal policy, is an effective means of achieving an exchange rate target, whether that target is an unchanged exchange rate anchor to a single currency or a basket of currencies, or a stable rate with low volatility.
2013: The economic prospects for the Caribbean depend on creative private sector responses to the challenges of the countries’ markets for exports of goods and services, principally in North America and Europe. Governments’ role is to stabilise exchange rates, thereby minimising inflation and ensuring domestic policy credibility, to support the private sector export thrust in selected, strategic areas, and to secure the social safety net for vulnerable groups in society. These countries have all achieved a relatively good quality of life for their citizens, reflected in Human Development Indices that range from the medium to the highest category; simply by avoiding economic contraction they may preserve a comparatively good lifestyle, in the interval that will be required while new investments in exports, tourism and other export services germinate.