Working Papers

An Alternative Policy Approach to Growth and Stabilisation in Small Open Economies

This chapter recommends an alternative to the standard approach to economic stabilisation and growth policy for small open economies. The standard view, reflected in the analyses of the IMF, other international institutions, most think tanks and the media, is that a combination of credible inflation targetting regimes, flexible exchange rates, and fiscal sustainability are the core elements of a policy regime that is appropriate for all countries, regardless of size. Instead, for small open economies we propose the use of fiscal management to maintain and improve the international competitiveness of the economy, to maximise the inflow of private foreign capital motivated by attractive rates of return, and to stabilise inflation expectations by anchoring the exchange rate to an international reserve currency. This chapter explains the alternative policy framework, and compares it with the standard approach.

The Time Has Come to Permanently Retire All Our Caribbean Currencies

The currencies of Caribbean countries have now outlived their usefulness, and have become a liability. They were devised at a time when most payments were made using notes and coin, issued in distant metropolitan centres. Scarcity of the means of payment was a severe hindrance to commerce. In response Currency Boards were set up, to issue local currency as needed in the colonies. The system worked well because the local currency issue was backed by an equivalent value of Sterling, in a global system of fixed exchange rates. In contrast, nowadays payments are made mostly by electronic communication, credit and debit cards, cheques and drafts, with settlement over digitized bank accounts. In today’s world an own currency has become a liability for small economies, limiting access to international goods and services, exposing residents to risks of currency devaluation and inflation, eroding the value of domestic savings, increasing economic inequalities, providing a tool for unproductive government spending, and diverting attention from the need to increase productivity and enhance international competitiveness. You can also access this publication on The Social Sciences Research Network.

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