DP1281 Long-Term Growth and Short-Term Economic Instability

Author(s): Philippe Martin, Carol Ann Rogers
Publication Date: November 1995
Keyword(s): Economic Fluctuations, Growth, Learning-by-doing, Short-term Instability
JEL(s): E32, O40
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1281

When learning-by-doing is at the origin of growth, we show that growth rates should be negatively related to the amplitude of the business cycle if the growth rate in human capital is increasing and concave in the cyclical component of production. Empirical evidence strongly supports this finding for industrialized countries and European regions. Using the standard control variables, we find that countries and regions that have higher standard deviations of growth and of unemployment have lower growth rates. The result does not come from an effect of instability on investment. The negative relation does not hold for non-industrialized countries, however, for which learning-by-doing may not to be the main engine of growth.