Do Business Cycles Cast Long Shadows? Short-Run Persistence and Economic Growth

This article explores the links between cyclical fluctuations and long-run growth in the context of an endogenous growth model with aggregate demand externalities. In this model, aggregate demand and growth rates are positively correlated. In the presence of exogenous cyclical shocks, the model is able to generate persistent fluctuations through the effects that business cycles have on aggregate demand, profits and technological progress. Persistence becomes a measure of the response to business cycles of growth- related variables. Empirical evidence from a large sample of countries suggests that there is indeed a correlation between how persistent fluctuations are and the long-term growth rates of GDP.