Economic Growth and Business Cycle Variability: 1870-1986
Journal of Post Keynesian Economics, Vol. 17, pp. 561-577, 1992
Posted: 18 Jan 2010
Date Written: 1992
From 1870 to the present the business cycle has become less volatile in major developed market economies. This could be a concern because according to the Schumpeter-Kuznets tradition a fall in business cycle volatility should result in a fall in the rate of economic growth. But has this been the case? If there is a trade-off between economic growth and cyclical volatility than government policies to reduce cyclical volatility could be reducing economic wealth. In light of this, a systematic and rigorous examination of the relationship between economic growth and cyclical volatility has been done. Using Spearman correlation, regression, and graphical analysis the relationship between per-capita GDP growth and cyclical volatility for thirteen developed market economies within the 1870-1908, 1870-1928, 1947-1986, and 1954-1972 time-frames and from the pre-Depression to the post-World War II periods has been examined. The results show that while in the short term there can be a positive relationship between growth and cyclical volatility, this relationship is weak with many outliers. High growth was accompanied by both high and low cyclical volatility. Moreover, in the long term of each country examined, increasing growth is accompanied by decreasing volatility. The increase in economic growth tended to be greater when the reduction of cyclical volatility was greater (a weak relationship of -0.10). These results are contradictory to the Kuznets-Schumpeter hypothesis. It can therefore be concluded that there is no evidence of a trade-off between business cyclical volatility and economic growth. There is even some evidence that a negative relationship exists. The wide array of growth rate and volatility level mappings suggests that the lower range of volatility levels represents what is realizable for other developed economies. The estimates presented provide some support to the hypothesis that relatively high rates of growth are possible with relatively low levels of business cycle volatility and that government policies to reduce cycle volatility would not necessarily result in lower economic growth.
Keywords: Growth, Business Cycles, Variability, Kuznets-Schumpeter, Trade-off
JEL Classification: E32, O40, N10
Suggested Citation: Suggested Citation