Business cycles and economic growth in Latin America...

The aim of this paper is to do a survey on both theoretical and empirical literature that analyses the effects of business cycles on economic growth. We review the two main theoretical alternative approaches that have addressed this relationship. The structure of the models and, more importantly, their implications are outlined. In particular, creative destruction models imply the existence of positive effects from business cycles on economic growth, while learning by doing models have opposite implications. More general models, where positive or negative effects of business cycles may exist depending on the structure of the economy or the sources of economic growth, are also reviewed. On the other hand, it will be apparent that empirical evidence is ambiguous. This ambiguity is present in different sets of countries, periods, and estimation methods. In an attempt to go beyond the correlation between business cycles (measured by the standard deviation of GDP growth rate) and economic growth, additional research has analysed the sources of macroeconomic volatility. External sources of volatility and economic policy volatility have been found to be the most important determinants.