Does Demand Volatility Lower Growth and Raise Inflation? Evidence from the Caribbean

 
Author/Editor: Magda E. Kandil
 
Publication Date: April 29, 2014
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: The paper investigates asymmetry in the allocation of aggregate demand shocks between real output growth and price inflation over the business cycle in a sample of fifteen Caribbean countries. In most countries, the evidence indicates the existence of structural constraints, implying that positive demand shocks feed predominantly into prices while negative demand shocks mainly affect output. The high variability of aggregate demand in Caribbean countries, frequently exposed to shocks that are exacerbated by pro-cyclical policy stance, tends to create an upward bias on inflation and a downward bias on real output growth, on average, over time. The analysis highlights the benefits of eliminating structural rigidities responsible for asymmetric real and inflationary effects and points to the dangers of procyclical macroeconomic policies that exacerbate the adverse effects of demand variability.
 
Series: Working Paper No. 14/67
Subject(s): Economic growth | Caribbean | Demand | External shocks | Inflation | Business cycles | Economic models

 
English
Publication Date: April 29, 2014
ISBN/ISSN: 9781484359679/1018-5941 Format: Paper
Stock No: WPIEA2014067 Pages: 34
Price:
US$18.00 (Academic Rate:
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