Behavioral Macroeconomics in Emerging Economies: Sentiment Shocks, Policy Transmission and Market Volatility Dynamics

Abstract

This article has examined how behavioural macroeconomics can help to explain economic effects in emerging economies and extends the study to the interactions between sentiment shocks, policy transmission and market volatility. But in addition to traditional macroeconomic fundamentals, consumer confidence and investor expectations and uncertainties will play an important role in how effective monetary/fiscal policy will be in the future. The potential multiplicative nature of behavioural reactions, the implications for financial stability and the implications for the policy outcomes are emphasized. The authors conclude that integration of behavioural indicators into the economy's macroeconomic policy-making process can enhance policy credibility, help make economies more resilient and facilitate the sustainable growth of more interconnected emerging market economies.