2. Time to Improve the Existing Models

The success of inflation management after the 1980s in the Western world is generally credited to the monetary policy of inflation targeting widely adopted by central banks in their DSGE models. Evidence and discussion can be found in the contributions of Svensson [3], who concludes that inflation targeting is superior to money growth or exchange rate targeting in that it decreases inflation variability, Christopher et al. [4], who argue that optimal policy rule responds not only to price inflation but also to aggregate output gap or wage inflation due to staggered nominal contracts and monopolistic competition, and Kim and Mehrotra [5], who find the complementary effects among inflation targeting and macroprudential policies in Asia-Pacific economies. Bernanke et al. [6] provide an international survey of the economic performance of inflation targeting policies in nine countries, showing that such a policy scheme improves the climate for economic growth.

Colander et al. [13] further claim that the widely acceptance of such incomprehensive NCM/DSGE models is one of the causes of the GFC.

The definition of middle-income trap may vary as different economies exhibit different performance during this period. According to Felipe et al. [23], there are two types of middle-income trap: the lower-middle-income trap and the higher-middle-income trap. The first occurs when economies climb up from lower-middle-income to higher-middle-income, and the latter from higher-middle-income to high-income.

Representative literature is the work conducted by Robinson [29], who maintains that development of the financial market is merely a passive result of general economic growth.

For more detailed discussion on this issue, see the contribution conducted by Festré [33].

They analysed the long-run time series of the U.S. economic data and conclude that development of financial sectors is closely linked to the overall economic growth.

These LDCs include Japan, Korea, India, Mexico, Colombia, Brazil and so on.

Just as Levine and Zervos [37, p. 1] concluded, ‘Do well-functioning stock markets and banks promote long-run economic growth? \(\ldots \)show that stock market liquidity and banking development both positively predict growth, capital accumulation, and productivity improvements\(\ldots \)’.

King and Levine [38] use four kinds of indicators to define the level of financial developments. For simplicity, we only use one indicator—the ratio of domestic credit created by financial sector to GDP. The same conclusions can be obtained by using other indicators as well, such as M2 to GDP ratio.

Full report is available online at https://​www.​imf.​org/​media/​Websites/​IMF/​imported-flagshipissues/​external/​pubs/​ft/​weo/​2000/​01/​pdf/​chapter3pdf.​ashx.

Available at http://​chfs.​swufe.​edu.​cn/​ListPage/​ListPageIndex?​categoryid=​20.

The original data can be accessed at http://​data.​worldbank.​org/​indicator/​SP.​URB.​TOTL.​IN.​ZS.

According to McKinsey Global Institute, these social layers are categorized according to the annual income: globals \(\ge \) 1,000,000 rupees; strivers = 500,000–1,000,000 rupees; seekers = 200,000–499,999 rupees; aspirers = 90,000–199,999 rupees; deprived \(\le \) 90,000 rupees. Strivers and seekers are defined as middle class in India.

There are several important studies on this issue: Riskin et al. [45], Yang [46], Chen and Fleisher [47], Zhou [48, 49]. These contributions provide empirical evidence of income inequality in China over the last decades. For the income inequality in Brazil, see Deininger and Squire [50] (this study contains data sets and analysis of a variety of economies including Brazil), Azzoni [51], Szwarcwald et al. [52], Barros et al. [53] and Messias [54]. The income inequality in India is well studied in Piketty and Qian [55], Salaimartin [56], Subramanian et al. [57] and Dreze and Sen [58].