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Do business cycles cast long shadows? Short-run persistence and economic growth

Author: Fatás, Antonio INSEAD Area: Economics and Political Science Series: Working Paper ; 94/51/EPS Publisher: Fontainebleau : INSEAD, 1994.Language: EnglishDescription: 27 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: We explore the links between short-run (cyclical) phenomena and the long-run technological trend of output. We show that there is a positive correlation between the degree of persistence of short-run fluctuations and the average growth rates in cross-country and cross-industry data. We present an endogenous growth model with aggregate demand shocks that can account for this positive correlation. Although the shocks in the model are cyclical, they are able to generate persistent fluctuations through the effects that they have on technological progress. Persistence becomes a mesure of the growth lost (or gained) during a recession (or a boom). Growth becomes a necessary condition for the shocks to be persistent and the degree of persistence is a function of the speed at which productivity increases. A key featue of the model is the cyclical behavior of those resources reponsible for growth. We verify this assumption by showing the procylical behavior of RandD expenditures in the US, Germany and Japan
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We explore the links between short-run (cyclical) phenomena and the long-run technological trend of output. We show that there is a positive correlation between the degree of persistence of short-run fluctuations and the average growth rates in cross-country and cross-industry data. We present an endogenous growth model with aggregate demand shocks that can account for this positive correlation. Although the shocks in the model are cyclical, they are able to generate persistent fluctuations through the effects that they have on technological progress. Persistence becomes a mesure of the growth lost (or gained) during a recession (or a boom). Growth becomes a necessary condition for the shocks to be persistent and the degree of persistence is a function of the speed at which productivity increases. A key featue of the model is the cyclical behavior of those resources reponsible for growth. We verify this assumption by showing the procylical behavior of RandD expenditures in the US, Germany and Japan

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