ABSTRACT
This chapter argues that economic growth can also be influenced by monetary policy, although, by monetary policy we have in mind a richer range of policies than simply money supply control. It reviews the orthodox approach to the channels of transmission of monetary policy and deals with the literature on monetary policy in small islands. The chapter explores the possibilities of monetary policies in small open economies. Orthodox monetary theory rules out the possibility for monetary policy to promote economic growth in very small open economies, such as island economies. The discussion about the monetary policy effectiveness usually distinguishes two alternative transmission mechanisms. Most literature on monetary policy in small island economies points out ineffectiveness to promote economic growth. The chapter analyzes how monetary policy can contribute to the development of small island economies. The conclusion that follows then is that small island economies would not have the possibility to implement their own monetary policy.
