THE POLITICAL ECONOMY OF MONETARY FOLLOWERSHIP IN SURPLUS COUNTRIES. THE DIVIDE BETWEEN SMALL AND MIDDLE POWERS

This research is about the impact of states’ financial size on their choices in the field of monetary and exchange rate policy. The main argument of the thesis is that small countries, under certain conditions, can be counterintuitively more autonomous in these policy dimensions than middle-sized states. This conclusion, and its corollaries, proceed from the unsatisfactory explanation given by the present literature, in both economics and political science, to the policy outcomes observed in small states, and results from an original application of the Collective Choice Theory to strategic interactions within asymmetrical monetary systems. A model is designed to depict an international payment system led by a leader country with significant balance-of-payment problems, surrounded by minor states characterised by a persistent record of current account surplus. The model investigates the impact of financial size on the bargaining among small and medium-sized states for the preservation of policy autonomy vis à vis an interdependent economic environment. States are supposed to select one of two alternatives between following the leader’s policies, so as to support the stability of the system, or remaining neutral, so as to pursue domestic-oriented goals. The results, both on the theoretical and the empirical side, show that small surplus countries, under the assumptions of the model, are averagely more autonomous than middle powers, that is, less prone to take on responsibility for the smooth functioning of an international payment system. In turn, this makes traditional theories incomplete in the explanation of monetary followership in small countries, while the present model explains this phenomenon through the action of neighbouring middle powers in providing selective incentives.