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Uncovering Some Causal Relationships between Productivity Growth and the Structure of Economic Fluctuations: A Tentative Survey

  • Philippe Aghion
  • Gilles Saint-Paul

This paper discusses recent theoretical and empirical work on the interactions between growth and business cycles. One may distinguish two very different types of approaches to the problem of the influence of macroeconomic fluctuations on long-run growth. In the first type of approach, which relies on learning by doing mechanisms or aggregate demand externalities, productivity growth and direct production activities are complements. An expansion therefore has a positive long-run effect on total factor productivity. In the second type of approach, hereafter labeled 'opportunity cost or 'learning-by-doing', productivity growth and production activities are substitutes. The opportunity cost of some productivity improving activities falls in a recession, which has a long-run positive impact on output. This does not mean, however, that recessions should on average last longer or be more frequent, since the expectation of future recessions reduces today's incentives for productivity growth. We also briefly discuss some empirical work which is mildly supportive of the opportunity cost approach, while showing that it can be reconciled with the observed pro-cyclical behavior of measured total factor productivity. We also describe some theoretical work on the effects of growth on business cycles.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4603.

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Date of creation: Dec 1993
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Publication status: published as LABOUR, Review of Labour Economics and Industrial Relations, vol. 12, no. 2, July 1998, pp. 279-303
Handle: RePEc:nbr:nberwo:4603
Note: EFG
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  1. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Robert E. Hall, 1999. "Reorganization," NBER Working Papers 7181, National Bureau of Economic Research, Inc.
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  4. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  6. Caballero, Ricardo J & Hammour, Mohamad L, 1994. "The Cleansing Effect of Recessions," American Economic Review, American Economic Association, vol. 84(5), pages 1350-68, December.
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  9. Campbell, John & Mankiw, Gregory, 1987. "Are Output Fluctuations Transitory?," Scholarly Articles 3122545, Harvard University Department of Economics.
  10. Saint-Paul, Gilles, 1993. "Productivity growth and the structure of the business cycle," European Economic Review, Elsevier, vol. 37(4), pages 861-883, May.
  11. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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  15. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
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  18. Karl Shell, 2010. "Inventive Activity, Industrial Organization and Economic Growth," Levine's Working Paper Archive 1408, David K. Levine.
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