A common question in the literature on economic fluctuations is whether business cycles are all alike. Among industrial economies, one of the most analysed characteristics of business cycles is the persistence of output fluctuations. In Discussion Paper No. 1340, Research Affiliate Antonio Fatás shows that, although all OECD countries display persistent fluctuations, there are large cross-country differences in the degree of persistence. A key finding of the paper is that these differences are strongly correlated to differences in the long-term growth rate of GNP. Countries that display a large average GNP growth rate in the last 35 years also present a high degree of short-term persistence.

Based on this finding, the author proposes an explanation for the differences in persistence which has far-reaching implications for the interactions between fluctuations and growth and for the concept of persistence itself. The explanation requires a model where fluctuations are not just deviations around a trend determined by technological progress, and where the growth and business cycle components of output are correlated. An explanation is proposed based on an endogenous growth model with exogenous cyclical shocks. It is found that, despite the cyclical nature of the shocks, output fluctuations are persistent and the degree of persistence is an increasing function of long-term growth rates. Growth dynamics become an important component of the transmission of business cycles. The paper concludes that the analysis of economic fluctuations in models where technological progress is assumed to be exogenous can be misleading.