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ON THE INTERACTION BETWEEN ECONOMIC GROWTH AND BUSINESS CYCLES

Published online by Cambridge University Press:  29 March 2016

Ivan Mendieta-Muñoz
Ivan Mendieta-Muñoz*
Affiliation:
University of Kent
*
Address correspondence to: Ivan Mendieta-Muñoz, Keynes College, School of Economics, University of Kent, Canterbury CT2 7NP, Kent, UK; e-mail: iim3@kent.ac.uk.
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Abstract

The present paper studies the interaction between short-run business cycle fluctuations and economic growth at the empirical level. We identify a measure of potential output with that rate of growth consistent with a constant unemployment rate, and we estimate the effects of GDP growth rates on the latter in 13 Latin American and 18 OECD countries during the period 1981–2011. The results of both parametric (OLS/IV and a panel estimator that allows for parameter heterogeneity and cross-section dependence) and nonparametric (a penalized regression spline estimator) econometric techniques show that the measure of potential output experiences positive (negative) changes in periods of high (low) growth in the majority of countries. However, in contrast to the sample of OECD countries, we find that less than half of the sample of Latin American countries experience statistically significant changes in this measure of potential output in periods of low growth.

Keywords

Growth and CyclesPotential Rate of GrowthRate of Growth Consistent with a Constant Unemployment RateHysteresis
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 4 , June 2017 , pp. 982 - 1022
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

I am deeply grateful to Miguel León-Ledesma, Luca Zanin, and Matteo Lanzafame and to one anonymous referee for their constant help, and for valuable comments and suggestions on previous drafts of this paper. I have also benefited from comments by Olivier Blanchard, Tony Thirlwall, Jagjit Chadha, Lucia Buono, Alan Carruth, Katsutuki Shibayama, Hans-Martin Krolzig, Yu Zhu, Arne Risa Hole, and the seminar audience at the University of Kent. All remaining errors are my own.

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