Friday, January 7, 2011

Jeff Frankel Thinks The West Can Learn Lessons In Economic Theory From The East

Hard to put it any better than he does:

The Phylloxera Analogy: Lessons from Emerging Markets

In 2008, the global financial system was grievously infected by so-called toxic assets originating in the United States. As a result of the crisis, many have asked what fundamental rethinking will be necessary to save macroeconomic theory. Some answers may lie with models that have in the past been applied to fit the realities of emerging markets — models that are at home with the financial market imperfections that have now unexpectedly turned up in industrialized countries. The imperfections include default risk, asymmetric information, incentive incompatibility, procyclicality of capital flows, procyclicality of fiscal policy, imperfect property rights, and other flawed institutions. To be sure, many of these theories had been first constructed in the context of industrialized economies, but they had not become mainstream there. Only in the context of less advanced economies were the imperfections undeniable. There the models thrived.

It's a short blog post, but it includes a useful ungated link to his survey of monetary policy in emerging markets (download here; Doc format).

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