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Does Demand Volatility Lower Growth and Raise Inflation? Evidence from the Caribbean

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  • Ms. Magda E. Kandil

Abstract

The paper investigates asymmetry in the allocation of aggregate demand shocks between real output growth and price inflation over the business cycle in a sample of fifteen Caribbean countries. In most countries, the evidence indicates the existence of structural constraints, implying that positive demand shocks feed predominantly into prices while negative demand shocks mainly affect output. The high variability of aggregate demand in Caribbean countries, frequently exposed to shocks that are exacerbated by pro-cyclical policy stance, tends to create an upward bias on inflation and a downward bias on real output growth, on average, over time. The analysis highlights the benefits of eliminating structural rigidities responsible for asymmetric real and inflationary effects and points to the dangers of procyclical macroeconomic policies that exacerbate the adverse effects of demand variability.

Suggested Citation

  • Ms. Magda E. Kandil, 2014. "Does Demand Volatility Lower Growth and Raise Inflation? Evidence from the Caribbean," IMF Working Papers 2014/067, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2014/067
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    More about this item

    Keywords

    WP; price inflation; demand variability; output growth; trend inflation; energy price; price rigidity; trade balance; Demand Shocks Asymmetric Effects Contractionary and Inflationary Biases; price uncertainty; price flexibility; output contraction; price inflation to expansionary demand shocks; product price; real growth; inflation bias; expansionary demand shock; inflation to expansionary demand shocks; Inflation; Exchange rates; Production growth; Sticky prices; Exchange rate arrangements; Caribbean;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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