This article compares fiscal, monetary and exchange-rate policy regimes in Iceland and Malta between 1964 and 2007 and analyses their divergent macroeconomic outcomes. While the two open economies faced similar external influences and shocks, their policy regimes evolved differently. Iceland relied on exchange-rate adjustments within a fragmented and weakly coordinated policy framework, generating persistent inflation and volatility, especially during the 1970s and 1980s. Malta, by contrast, maintained exchange-rate stability supported by stronger fiscal coordination and institutional credibility, achieving lower and more stable inflation. The article advances a “credibility–coordination” framework in which macroeconomic outcomes depend on the interaction between exchange-rate regimes, institutional capacity and fiscal alignment. The findings manifest that stability in the two small economies was determined less by structural exposure than by the coherence of policy regimes.