Some features of emerging market and developing economies (from Montiel) that affect the way their economies work, and to which textbook macroeconomic models for advanced economies should be adpated.
1. Lower income per head: implies different spending behaviour, different institutional quality, different interest rates and exchange rate policies.
2. Small economies: specialised and open.
3. Structures of trade and production are different from advanced economies.
4. Specific parts of the balance of payments more important: eg concessional loans and remittances.
5. Less financial integration internationally
6. Underdeveloped domestic financial sector that inhibits international integration.
7. Fiscal policy conducted in different conditions: eg greater government role in production and higher non-tax revenue. Greater tendency to deficit and printing money reduces confidence of private creditors and so lowers level of sustainable debt.
8. Monetary policy less independent and more subordinate to fiscal policy. Because financial systems underdeveloped and dominated by banks, these economies tend to have different, more direct instruments of monetary policy for different kinds of targets: eg CB supplies credit to banks with specific target for money supply or stock of domestic credit in mind.
9. Exchange rates tend to be "determined": towards the more rigid end of regime spectrum because of greater intervention. Exchange rate targets vs inflation targets.
10. In labour markets, nominal wages are less "sticky" to price shocks in the short run. Nominal wage adjustment minimises impact of prices shocks on employment and so output. Therefore, less "Keynesian unemployment" in deflationary period?
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