Policy Autonomy of Small Countries

Abstract

As the title indicates, this paper deals with policy autonomy of small countries in the world economy. In keeping with the subject of the conference, I shall narrow the topic down to treat only policy autonomy with respect to the rate of inflation. This also suggests that I should limit the analysis to the case of fixed exchange rate economies. Under a flexible exchange rate regime a country may independently choose its own long-run rate of inflation, so the autonomy issue becomes uninteresting. In the shorter run even a flexible exchange rate will transmit inflationary impulses between countries, so the topic would remain relevant, but an analysis of this case will, for the sake of brevity, be left for another occasion.

This paper contains ideas developed in connection with a research project on ‘National Economic Policy and the International Monetary System’ at the Graduate Institute of International Studies under a grant from the Ford Foundation. The author would like to thank P. D. Jonson and H. Kierzkowsky for helpful comments on the previous draft.