Country size, growth and the economic and monetary union

Abstract

This dissertation investigates the relationship between country size and growth in particular in the context of a monetary union. To further a global understanding of the link between country size and growth in the EMU, we follow an interdisciplinary approach, including econometrics, political economy analysis and macro-economic modelling. In the second chapter, we ask whether country size matters for aggregate growth and its volatility. To capture the effect of country size in its many dimensions, we use Principal Component Analysis (PCA) to develop an original country-size index that includes population, GDP and surface area. Using a panel data set of 163 countries for the period 1960 through 2007, we find that country size has a significant and negative impact on economic performance for all countries and within certain groups. The third chapter sheds light on how an original institutional context – namely, that of the Economic and Monetary Union (EMU) – makes country size play a particular role in accounting for economic growth. Using panel data for the fifteen eurozone countries (1998-2008), the “size divide’,’ in terms of economic performance between small and large eurozone countries, or negative effect of demographic size on GDP growth, is shown to be a by-product of the monetary union. In the fourth chapter, we approach the question of country size in the EMU from a theoretical perspective with DSGE (Dynamic Stochastic General Equilibrium) modelling. We detail how countries of different sizes react differently to their own and their neighbours’ fiscal policies to determine what type of size-appropriate fiscal policies spur growth in the wake of a crisis.