Growth and Macroeconomic Fluctuations: The Case of Latin America

Abstract

Based on time-series from 1960 to 1995, we show the existence –for Latin American countries– of a short and long run negative correlation between economic growth and uncertainty. The probable cause of such relationship is time-variant; it is only after 1990 that investment-based theories on the link between uncertainty and growth cannot be rejected by the data. Further, the data cannot support the claim that government expenditure explains the correlation between growth and uncertainty. Our results suggest that the average growth rate is endogenous to policy innovations. This implies that the long-run depends on short-run movements in activity, thereby casting some doubts on the conventional wisdom that assumes the dichotomy between an invariant steady state path and fluctuations around it.