The Effects of Business Cycles on Growth

This paper studies the link between business cycles and long-term growth rates. We present empirical evidence that uncovers interesting and significant interactions between cycles and growth. We show that business cycles cannot be considered as temporary deviations from a trend and that there is a strong positive correlation between the persistence of short-term fluctuations and long-term growth rates. A simple endogenous growth model where business cycles affect growth can easily replicate this correlation. We then study the link between volatility and growth. We show that countries with more volatile fluctuations display lower long-term growth rates. We also find evidence that there is a non-linearity in this relationship. The effect of business cycles on growth is much larger for poor countries or countries with a lower degree of financial development.