<p>There are several reasons:</p>
<ol>
<li>Developing countries often pursue loose monetary policy (see Sargent and Wallace, 1981). This should not be surprising, poorer countries often do not large tax bases and borrowing is too expensive for them.</li>
</ol>
<p>A government intertemporal budget constraint is given by:</p>
<p><span class="math-container">$$ G= T + B + \theta$$</span></p>
<p>So government spending <span class="math-container">$G$</span> has to be financed either through taxes (minus interest payments <span class="math-container">$T$</span>, issuing bonds <span class="math-container">$B$</span> or by creating more high powered money <span class="math-container">$\theta$</span>.</p>
<p>In poor countries people are poor so there aren’t really large tax bases and investors are more hesitant to lend to poor countries that are less likely to pay the debt back.</p>
<p>However, poor countries do not face any constraints on how much high powered money they can create (unless they are part of monetary union, or dollarized). Inflation depends (among other factors) positively on money supply.</p>
<ol start="2">
<li>Emerging markets are often export oriented and have higher chances of facing balance of payment crisis (Liviatan and Piterman 1986).</li>
</ol>
<p>It is beneficial for exporting country to have weak currency so many exporting countries go out of their way (eg China) to try to make their currency cheaper vis-a-vis developed nations by central bank intervention in foreign exchange markets.</p>
<p>Often balance of payment crisis can also force depreciation on currency.</p>

CC BY-SA 4.0
2022-08-26T20:06:15.780Z
It's unclear how all of this ties up with the question, in particular the relationship between growth, productivity, and prices & wages.
BrsG
CC BY-SA 4.0
2022-08-26T21:05:11.437Z
@BrsG the question asks **why is inflation higher in emerging economies**, not about what is the relationship between growth, productivity, prices and wages. That is also the question I am answering. OP just states in his question that he thinks that productivity changes do not explain inflation. As far as I can see it’s just a show of prior research before posting Q
1muflon1
CC BY-SA 4.0
2022-08-27T05:46:00.407Z
Well, are you really saying that EM's particular growth story, with faster capital accumulation and productivity growth, has nothing to do with higher inflation?
BrsG
CC BY-SA 4.0
2022-08-27T08:45:37.013Z
@BrsG not with higher inflation. 1. **Economic growth is deflationary** - not inflationary. 2. Productivity growth in itself can be increasing nominal prices in non-tradable service sectors but in most emerging markets service sectors are small. For example, during past 10 years China with extreme productivity and economic growth had inflation lower than worlds average, only marginally higher than US, and now it has inflation lower then US. If economic/productivity growth would be causing inflation China would have to be experiencing massive levels of inflation during past decade
1muflon1
CC BY-SA 4.0
2022-08-29T11:18:19.933Z
What if the output gap is positive *and* growth is above potential growth? Would you still say economic growth is deflationary?
BrsG
CC BY-SA 4.0
2022-08-29T14:18:28.073Z
@BrsG yes because economic growth is in growth literature generally understood as the growth of real potential output. What you discuss would be different business cycle volatility. Literature on economic growth mostly ignores business cycles.  A stagnant country will still experience business cycle around the natural level of output, expansion (first phase of business cycle)  is not economic growth as understood by growth literature (e.g. Solow-Swan or Romer Model).
1muflon1
CC BY-SA 4.0
2022-08-29T16:28:26.257Z
Regarding wether there is any relationship between some asymmetric business cycle volatility in emerging countries is there any published research that shows there is such relationships? Most published research mentioned the two reasons I listed as a main explanations
1muflon1
CC BY-SA 4.0
2022-08-26T16:26:52.897Z
2022-08-26T16:34:48.020Z
2022-08-26T16:34:48.020Z
1muflon1
<p>Inflation rates are higher in emerging economies than in developed economies.
<a href="https://i.sstatic.net/jrTVC.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/jrTVC.png" alt="enter image description here" /></a>
(<a href="https://www.worldbank.org/en/research/publication/inflation-in-emerging-and-developing-economies" rel="nofollow noreferrer">source</a>)</p>
<p>Why is that so ?</p>
<p>Most explanations I have found refer to some kind of catching up, but it does not immediately clicks for me.
Notably, there is some catching up of productivity, but if wages and productivity both increase at the same rate (or average at the same rate), this should not lead to an increase in prices.</p>

<macroeconomics><inflation><international-economics>
Why is inflation higher in emerging economies?
Anthony Martin
# Why is inflation higher in emerging economies?

(Asked by: username_0 on 2022-08-26)

Inflation rates are higher in emerging economies than in developed economies.
[![enter image description here](https://i.sstatic.net/jrTVC.png)](https://i.sstatic.net/jrTVC.png)
([source](https://www.worldbank.org/en/research/publication/inflation-in-emerging-and-developing-economies))

Why is that so ?

Most explanations I have found refer to some kind of catching up, but it does not immediately clicks for me.
Notably, there is some catching up of productivity, but if wages and productivity both increase at the same rate (or average at the same rate), this should not lead to an increase in prices.

**Tags:** macroeconomics, inflation, international-economics


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## 1 answers

### Answer by username_1 on 2022-08-26. Score: 3

There are several reasons:

1. Developing countries often pursue loose monetary policy (see Sargent and Wallace, 1981). This should not be surprising, poorer countries often do not large tax bases and borrowing is too expensive for them.

A government intertemporal budget constraint is given by:

$$ G= T + B + \theta$$

So government spending $G$ has to be financed either through taxes (minus interest payments $T$, issuing bonds $B$ or by creating more high powered money $\theta$.

In poor countries people are poor so there aren’t really large tax bases and investors are more hesitant to lend to poor countries that are less likely to pay the debt back.

However, poor countries do not face any constraints on how much high powered money they can create (unless they are part of monetary union, or dollarized). Inflation depends (among other factors) positively on money supply.

2. Emerging markets are often export oriented and have higher chances of facing balance of payment crisis (Liviatan and Piterman 1986).

It is beneficial for exporting country to have weak currency so many exporting countries go out of their way (eg China) to try to make their currency cheaper vis-a-vis developed nations by central bank intervention in foreign exchange markets.

Often balance of payment crisis can also force depreciation on currency.

> **Comments:**
> **username_2**: It's unclear how all of this ties up with the question, in particular the relationship between growth, productivity, and prices & wages.  
> **username_1**: @username_2 the question asks **why is inflation higher in emerging economies**, not about what is the relationship between growth, productivity, prices and wages. That is also the question I am answering. OP just states in his question that he thinks that productivity changes do not explain inflation. As far as I can see it’s just a show of prior research before posting Q  
> **username_2**: Well, are you really saying that EM's particular growth story, with faster capital accumulation and productivity growth, has nothing to do with higher inflation?  
> **username_1**: @username_2 not with higher inflation. 1. **Economic growth is deflationary** - not inflationary. 2. Productivity growth in itself can be increasing nominal prices in non-tradable service sectors but in most emerging markets service sectors are small. For example, during past 10 years China with extreme productivity and economic growth had inflation lower than worlds average, only marginally higher than US, and now it has inflation lower then US. If economic/productivity growth would be causing inflation China would have to be experiencing massive levels of inflation during past decade  
> **username_2**: What if the output gap is positive *and* growth is above potential growth? Would you still say economic growth is deflationary?  
> **username_1**: @username_2 yes because economic growth is in growth literature generally understood as the growth of real potential output. What you discuss would be different business cycle volatility. Literature on economic growth mostly ignores business cycles.  A stagnant country will still experience business cycle around the natural level of output, expansion (first phase of business cycle)  is not economic growth as understood by growth literature (e.g. Solow-Swan or Romer Model).  
> **username_1**: Regarding wether there is any relationship between some asymmetric business cycle volatility in emerging countries is there any published research that shows there is such relationships? Most published research mentioned the two reasons I listed as a main explanations  

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