Small and smart? an exploratory analysis of economic institutional choices of small countries and territories in the Caribbean

This thesis is about the consequences of the size of Caribbean small open economies for their institutional framework, exploring the extent to which their institutional choices have contributed to their ability to achieve their monetary policy objectives and to their economic performance. This study applies a mixed method design, using data from a survey among central banks and official documents, in addition to certain statistical methods and a cross-sectional analysis of a large sample of countries around the world. The findings suggest that the size, the exchange rate regime, and fiscal policy have influenced the monetary policy institutional choices of selected Caribbean countries. Most of these countries have exchange rate stability as their main monetary policy objective, exchange rate targeting regime as monetary policy regime, direct monetary policy instruments and limited central bank independence. These choices may have influenced their ability to use monetary policy for stabilization purposes. The study indicates that fiscal policy has not been supportive of monetary policy. Also, it suggests that institutional choices of Caribbean economies may have mitigated the negative effects of their size and may have contributed to their economic performance. The cross-sectional analysis indicates that country size has no significant relationship with the quality of monetary and fiscal policy institutions. Moreover, it suggests that the smaller a country is, the better its economic and political institutions are. The results indicate that small economies have stronger institutions than the rest of the world, possibly to compensate for the disadvantages related to their size.