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

35 Pages Posted: 3 Jun 2014

See all articles by Magda Kandil

Magda Kandil

International Monetary Fund (IMF)

Date Written: April 2014

Abstract

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.

Keywords: Economic growth, Caribbean, Demand, External shocks, Inflation, Business cycles, Economic models, Demand Shocks, Asymmetric Effects, Contractionary and Inflationary Biases., aggregate demand, price inflation, real output, money supply, monetary policy, relative prices, monetary fund, gdp deflator, macroeconomic performance, monetary economics, real wages, rate of inflation, price deflation, relative price variability, inflation growth, inflation across countries, inflationary pressures, average inflation, annual inflation, inflation targeting, central bank, money market, terms of trade, real interest rates, high inflation, monetary shocks, price level, rational expectations, average rate of

JEL Classification: E32, E31, E30

Suggested Citation

Kandil, Magda, Does Demand Volatility Lower Growth and Raise Inflation? Evidence from the Caribbean (April 2014). IMF Working Paper No. 14/67, Available at SSRN: https://ssrn.com/abstract=2445452

Magda Kandil (Contact Author)

International Monetary Fund (IMF) ( email )

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