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Endogenous Growth and Stochastic Trends

  • Fatás, Antonio

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1340.

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Date of creation: Feb 1996
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Handle: RePEc:cpr:ceprdp:1340
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  1. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-40, September.
  2. Bruno, Michael, 1993. "Crisis, Stabilization, and Economic Reform: Therapy by Consensus," OUP Catalogue, Oxford University Press, number 9780198286639.
  3. Cogley, T., 1989. "International Evidence On The Size Of The Random Walk In Output," Discussion Papers in Economics at the University of Washington 89-02, Department of Economics at the University of Washington.
  4. 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.
  5. Pindyck, Robert S. & Solimano, Andrés., 1993. "Economic instability and aggregate investment," Working papers 3552-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Campbell, John Y. & Mankiw, N. Gregory, 1989. "International evidence on the persistence of economic fluctuations," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 319-333, March.
  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. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation for Research in Economics, Yale University.
  9. John Y. Campbell & N. Gregory Mankiw, 1987. "Permanent and Transitory Components in Macroeconomic Fluctuations," NBER Working Papers 2169, National Bureau of Economic Research, Inc.
  10. 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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