Can Money Matter in small island developing states? Evidence using the Solow estimator Associate Professor Dr K. C Jankee (University of Mauritius) Chairman, Development Bank of Mauritius Ltd

Objective is to estimate the contribution of real money balances to the productive capacity of Small Island Developing Economies (SIDS)

Important issue in the light of the different financial and monetary policies adopted in these countries to develop and liberalise their financial systems

Important for the strategy of financial globalisation and increasing economic liberalisation

Features of SIDS Consensus that SIDS are different in a number of different ways: Exposure to Economic conditions in the rest of the world Small domestic market and high dependence on exports Limited terrestrial natural resource endowments and high import content Limited diversification possibilities Dependence on a narrow range of products Inability to influence international prices Market thinness

Peripherality High per unit transport cost Marginalisation Uncertainties of supply Need to keep large quantities of stocks

Trade Vulnerability High Dependence on Trade Taxes Vulnerability of Domestic Industries Dependence on Trade Preferences Limitations of the Subsidy Rules Role of state Trading enterprises TRIPS

Proneness to Natural Disasters Limited Ability to Exploit Economies of Scale Limitations on Domestic competition Difficulties in absorbing FDI Limited investment opportunities Problems of public administration etc

Literature Solow estimator (1957) of output elasticity of real money balances. Empirics: Bhattacharyay (1986) computed output elasticities for the monetary base and narrow money (M1) for India and Pakistan Result indicated very low output elasticities as in the case of U.S

Present paper computes output elasticity of real money balances for a sample of SIDS - Sample classified into those of low income, middle and high income countries. - sample also divided into those with low and high level of financial development

Computations Output elasticity of real money balances are computed using three alternative definitions of money as follows: 1. High Powered Money 2. Narrow Money Supply 3. Broad Money supply Opportunity cost variables: treasury bill rate, money market rate, discount rate

Results Results reported for the different sub samples Very low output elasticities of real money balances Ranging between Robustness tests undertaken

Conclusion contribution of real money balances to the productive capacity of the economy remains very low in the small island developing economies (SIDS)

Possible solutions to these economies: Foreign Ownership of intermediaries Regional markets Shared Regional infrastructure Financial (infrastructural services) imported from abroad Regulations and supervision

Capital Account opening and exchange rate arrangements

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