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Weak Expansions: A Distinctive Feature of the Business Cycle in Latin America and the Caribbean

Esteban Pérez Caldentey, Daniel Titelman, Pablo Carvallo

Abstract

Using two standard cycle methodologies (Classical and Deviation Cycle) and a comprehensive sample of 83 countries worldwide, including all developing regions, we show that the Latin American and Caribbean (LAC) cycle exhibits two distinctive features. First, and most importantly, its expansion performance is shorter and for the most part less intense than that of the rest of the regions considered, and in particular than that of East Asia and the Pacific. East Asia and the Pacific’s expansions last five years longer than those of LAC, and its output gain is 50% greater than that of LAC. Second, LAC tends to exhibit contractions that are not significantly different in terms of duration and amplitude than those of other regions. Both these features imply that the complete Latin American and Caribbean cycle has, overall, the shortest duration and smallest amplitude in relation to other regions. The specificities of the Latin American and Caribbean cycle are not confined to the short run. These are also reflected in variables such as productivity and investment, which are linked to long-run growth. East Asia and the Pacific’s cumulative gain in labor productivity during the expansionary phase is twice that of LAC. Moreover, the evidence also shows that the effects of the contraction in public investment surpass those of the expansion leading to a declining trend over the entire cycle. In this sense we suggest that policy analysis needs to increase its focus on the expansionary phase of the cycle. Improving our knowledge of the differences in the expansionary dynamics of countries and regions, can further our understanding of the differences in their rates of growth and levels of development. We also suggest that while, the management of the cycle affects the short-run fluctuations of economic activity and hence volatility, it is not trend neutral. Hence, the effects of aggregate demand management policies may be more persistent over time and less transitory than currently thought.

Published on 5 Feb 2014 in World Economic Review No 3, 2014