IMF Working Papers

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

By Magda E. Kandil

April 29, 2014

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Magda E. Kandil Does Demand Volatility Lower Growth and Raise Inflation? Evidence from the Caribbean, (USA: International Monetary Fund, 2014) accessed September 18, 2024
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.

Subject: Exchange rate arrangements, Exchange rates, Foreign exchange, Inflation, Prices, Production, Production growth, Sticky prices

Keywords: Caribbean, Demand Shocks Asymmetric Effects Contractionary and Inflationary Biases, Demand variability, Energy price, Exchange rate arrangements, Exchange rates, Expansionary demand shock, Inflation, Inflation bias, Inflation to expansionary demand shocks, Output contraction, Output growth, Price flexibility, Price inflation, Price inflation to expansionary demand shocks, Price rigidity, Price uncertainty, Product price, Production growth, Real growth, Sticky prices, Trade balance, Trend inflation, WP

Publication Details

  • Pages:

    34

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2014/067

  • Stock No:

    WPIEA2014067

  • ISBN:

    9781484359679

  • ISSN:

    1018-5941