Cyclical Inflationary and Contractionary Biases in Latin America and the Caribbean: Evidence and Implications

Magda Kandil

Eastern Economic Journal, 2011, vol. 37, issue 2, 214-238

Abstract: In a sample of 32 countries in Latin America and the Caribbean, the evidence indicates the existence of a kinked supply curve, implying positive demand shocks feed predominantly into prices while negative demand shocks mainly affect output. High variability of aggregate demand in these countries, frequently exposed to shocks, 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 the kinked nature of the supply curve and points to the dangers of pro-cyclical macroeconomic policies.

Date: 2011
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