Long-term Growth and Short-term Economic Instability
Abstract
When learning by doing is at the origin of growth the long-run growth rate should be negatively related to the amplitude of the business cycle if human capital accumulation is increasing and concave in the cyclical component of production. Empirical evidence strongly supports this finding for industrialized countries and European regions. Using the standard control variables, we find that countries and regions that have a higher standard deviation of growth and of unemployment have lower growth rates. The result does not come from an effect of instability on investment. The negative relation, however, does not hold for non-industrialized countries, for which learning by doing may not to be the main engine of growth.