Country Size, Appropriate Policy, and Economic Performance: Some Evidence from OECD Countries

This paper investigates economic performance and policies in OECD countries. Our hypothesis is that the effects of policy are determined by country-size. We employ non parametric distribution dynamics techniques (e.g. Quah, 1993) and we analyze differences across and within groups of countries by controlling for size and EMU membership. We first show that controlling for size only does not imply significant cross-country differences in performance. In contrast, controlling for both size and EMU membership reveals marked differences in performance and policies across groups of big and small countries, and between groups of similar size as well. Moreover, differences are more marked in the Euro Area than outside, and among big countries than among small ones. Furthermore, we show that differences in performances are related to diverging dynamics in domestic vs. external demand components, and to different strategies concerning fiscal, openness and structural policies. Finally, we draw implications on the most appropriate policy for countries of a given size.