A macroeconomic model for a small member of a monetary union

A small member of a monetary union faces limited macroeconomic policy options. Its money supply is tied to the trade balance by the “gold standard” exchange rate. Competitive depreciation is at union discretion. A balanced budget constraint eliminates discretionary deficit spending. The present small economy also takes the international interest rate. This paper introduces a flexible price level leading to price specie flow. An interest rate subsidy is also introduced. Fiscal policy and the interest rate subsidy may raise income subject to their tax burdens. Investment policy can affect economic growth.