ON THE INTERACTION BETWEEN ECONOMIC GROWTH AND BUSINESS CYCLES

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.