This raises the question as to whether small open economies (and that is what most emerging markets are) can conduct monetary policy independently of developments in advanced-economy financial markets. The traditional Mundell–Fleming model has taught us that monetary policy cannot be conducted independently where exchange rates are fixed. However, flexible exchange rates were expected to provide insulation against cross-border spillovers.
Therefore, real GDP growth is expected to show a clear decline in the April–June quarter, but the effects of the decline in demand after the tax hike will dissipate thereafter, and the economy is expected to return to a growth path above its potential from summer. Recovery in exports The next issue is developments in exports.