Aggregate demand and the endogeneity of the natural rate of growth: evidence from Latin American economies

• Published in: Cambridge journal of economics Vol. 33; no. 5; pp. 967 - 984
• Main Author: Libanio, G. A.
• Format: Journal Article
• Language: English
• Published: Oxford Oxford University Press 01-09-2009; Oxford Publishing Limited (England)
• Subjects: Aggregate demand; Business cycles; Cross-national analysis; Demand shocks; E10; E32; Economic activity; Economic fluctuations; Economic growth; Economic growth rate; Empirical research; Endogeneity; GDP; GNP; Gross Domestic Product; Gross National Product; Growth rates; Hypotheses; Keynesianism; Latin America; Long run economic growth; Macroeconomics; Natural rate of growth; O40; Output rate; Root test; Supply & demand; Time series; Trends; O40; Natural rate of growth; Endogeneity; E10; E32; Aggregate demand
• ISSN: 0309-166X; 1464-3545
• DOI: 10.1093/cje/ben059

This paper aims to explore the Keynesian idea that aggregate demand matters for economic activity, both in the short and long run. To that extent, it discusses the endogeneity of the natural rate of growth, and presents two empirical exercises: the first one tests for unit roots in output for 12 Latin American countries using panel data. The results suggest that gross domestic product series are non-stationary and therefore shocks (both from supply and demand) have persistent effects in the economy. The second exercise tests the hypothesis of an endogenous natural rate of growth, and suggests that potential output has been influenced by the actual level of economic activity in Latin American countries. This result corroborates the hypothesis that aggregate demand has long-run effects in the economy.