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Endogenous growth and stochastic trends

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  • Fatas, Antonio

Abstract

This paper shows that there exists a strong positive correlation between long-term growth rates and the persistence of output fluctuations in a cross section of countries. We argue that the traditional explanation of persistence, a real business cycles model with exogenous productivity shocks, cannot produce this correlation. We propose an explanation based on an endogenous growth model with exogenous cyclical shocks. We find that, despite the cyclical nature of the shocks, output fluctuations are persistent and the degree of persistence is an increasing function of long-term growth rates. Growth dynamics become an important component of the transmission of business cycles. We conclude that the analysis of economic fluctuations in models where technological progress is assumed to be exogenous can be misleading.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 45 (2000)
Issue (Month): 1 (February)
Pages: 107-128

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Handle: RePEc:eee:moneco:v:45:y:2000:i:1:p:107-128

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Cogley, Timothy, 1990. "International Evidence on the Size of the Random Walk in Output," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 501-18, June.
  2. John Y. Campbell & N. Gregory Mankiw, 1989. "International Evidence on the Persistence of Economic Fluctuations," NBER Working Papers 2498, National Bureau of Economic Research, Inc.
  3. Mankiw, N. Gregory & Campbell, John, 1987. "Permanent and Transitory Components in Macroeconomic Fluctuations," Scholarly Articles 3207697, Harvard University Department of Economics.
  4. Matthew D. Shapiro & Mark W. Watson, 1989. "Sources of Business Cycle Fluctuations," NBER Working Papers 2589, National Bureau of Economic Research, Inc.
  5. Bruno, Michael, 1993. "Crisis, Stabilization, and Economic Reform: Therapy by Consensus," OUP Catalogue, Oxford University Press, number 9780198286639.
  6. repec:fth:coluec:540 is not listed on IDEAS
  7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  8. Robert S. Pindyck & Andrés Solimano, 1993. "Economic Instability and Aggregate Investment," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 259-318 National Bureau of Economic Research, Inc.
  9. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  10. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1992. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  11. Stadler, G. W., 1986. "Real versus monetary business cycle theory and the statistical characteristics of output fluctuations," Economics Letters, Elsevier, vol. 22(1), pages 51-54.
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