Macroeconomic stability and economic growth: myths and realities

Felipe Bustamante, Bastián Gallardo and Guillermo Le Fort Varela

Revista CEPAL, 2020

Abstract: In this paper, we explore empirical relationships between sustained GDP growth and macroeconomic volatility, using World Economic Outlook data for the period 1980–2015, both in descriptive statistics and in fixed-effect panel regressions (IMF, 2016). The results debunk certain myths, such as those that maintain that more inflation generates more growth, that stabilization carries real costs, or that large inflows of foreign capital stimulate growth. We show that inflation has a tangible negative impact on growth and that there are “inflation thresholds”, beyond which that impact increases. Higher inflation is associated with greater nominal and real volatility, defined as cyclical output volatility. Furthermore, current account volatility contributes significantly to real volatility. Lastly, we show that real volatility has a negative impact on trend GDP growth and that macroeconomic volatility does not contribute to growth or well-being.

Date: 2020-08-31
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Persistent link: https://EconPapers.repec.org/RePEc:ecr:col070:46590

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