Issues in Monetary and Fiscal Policy in Small Developing States

A Case Study of the Caribbean

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This study examines how monetary and fiscal policies are implemented in Caribbean small states, tracing the differences and similarities in tax structure, current expenditure and current revenues. It shows the impact of monetary policy on inflation and the importance of exchange rate regimes to the effectiveness of monetary policy in the region. The authors show that fiscal stabilisation in the region is very low and as such countries within the region would benefit from insurance mechanisms and stabilisation funds.




The inherent vulnerability of small states affects the implementation of monetary and fiscal policies in these countries. This inherent vulnerability stems from their high dependence on a narrow range of exports and on strategic imports such as food and fuel. These features render small states disproportionately exposed to external economic shocks. Other characteristics which pose disadvantages for small states include their limited ability to exploit economies of scale, and their limited opportunities for diversification. These features have constrained policy implementation and success in small states and increased the importance and influence of external reserves, external financing, foreign investment and the international economic climate on domestic policy.


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