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What does it take to grow out of recession? An error-correction approach towards growth convergence of European and transition countries

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  • Olivier Damette

    (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, LEF - Laboratoire d'Economie Forestière - INRA - Institut National de la Recherche Agronomique - AgroParisTech)

  • Mathilde Maurel

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, FERDI - Fondation pour les Etudes et Recherches sur le Développement International)

  • Michael A. Stemmer

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

Consequences from the subsiding 2008 financial crisis on long-run economic growth are widely debated. Existing literature on previous recessions, such as Cerra and Saxena (2008), emphasizes the long-term loss inflicted on per capita GDP levels. This paper concentrates on typical business cycles in advanced European and transition countries and assumes that lower than normal growth during recessions is followed by a recovery period with above normal growth until the economy reaches its pre-crisis level. The objective is to assess the capacity to rebound, the speed of convergence towards a normal growth path as well as potential nonlinearities. Through exploiting the cointegration relationships among variables in long-run growth regressions and by employing a variety of panel error-correction models, results show a strong evidence of error-correction and different linear speed in the convergence process with the transition economies outpacing Western European countries. Our analysis is further extended into a Panel Smooth Transition Error-Correction Model (PSTR-ECM) to account for different regimes in convergence patterns according to a selection of transition variables. Whereas the velocity of convergence for European core countries exhibits a nonlinear pattern and differs with respect to price and flexibility, transition countries remain linear in their return to the growth trend. Ultimately, our results suggest that internal adjustments remain the key factors for both European and transition countries to recover from negative economic growth shocks.

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  • Olivier Damette & Mathilde Maurel & Michael A. Stemmer, 2016. "What does it take to grow out of recession? An error-correction approach towards growth convergence of European and transition countries," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01318131, HAL.
  • Handle: RePEc:hal:cesptp:halshs-01318131
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    Cited by:

    1. Ichiro Iwasaki & Mathilde Maurel, 2017. "The Impact of Crisis on Firm Creation and Regeneration in Russia: Regional Panel Data Analysis," Post-Print halshs-01505659, HAL.

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    More about this item

    Keywords

    business cycles; Economic growth; smooth-transition models; transition economies; error-correction models; panel cointegration;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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