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

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 d...

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Bibliographic Details
Main Author: Kandil, Magda
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2014
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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300 |a 34 pages 
651 4 |a Suriname 
653 |a Inflation 
653 |a Exchange rate arrangements 
653 |a Currency; Foreign exchange 
653 |a Deflation 
653 |a Production 
653 |a Production; Economic theory 
653 |a Macroeconomics: Production 
653 |a Foreign Exchange 
653 |a Price Level 
653 |a Cycles 
653 |a Prices 
653 |a Macroeconomics 
653 |a Sticky prices 
653 |a Business Fluctuations 
653 |a Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) 
653 |a Exchange rates 
653 |a Foreign exchange 
653 |a Production growth 
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520 |a 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