Macroeconomists traditionally view the business cycle and long-term growth as two separate phenomena. Both Keynesians and Classicals, have usually considered long-term growth as an exogenous trend. On the other hand, growth theorists have typically worked with models where short-term shocks have no impact on the long-run growth rate of the economy. In discussion paper No. 1281, Research Affiliate Philippe Martin and Carol Ann Rogers present a model in which the amplitude of the business cycle is a negative determinant of the long-term growth rate of the economy. They then test this prediction empirically. When learning-by-doing is at the origin of growth, the authors 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, they find that countries and regions that have higher standard deviations of growth and 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. The policy implications for developed countries are important. The rationale for counter-cyclical stabilization policies, monetary or fiscal, is strengthened even though the model they used is not Keynesian in nature.