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Cambridge Journal of Economics Advance Access originally published online on January 8, 2009
Cambridge Journal of Economics 2009 33(5):967-984; doi:10.1093/cje/ben059
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© The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

This article appears in the following Cambridge Journal of Economics issue: Special focus: Moral Economy and Development Economics [View the issue table of contents]

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

Gilberto A. Libânio*

* Federal University of Minas Gerais, Brazil

Address for correspondence: Gilberto Libânio, Federal University of Minas Gerais, Department of Economics, Avenida Antonio Carlos, 6627 Belo Horizonte, MG 31270-901, Brazil; email: gilberto{at}cedeplar.ufmg.br

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.

Key Words: Natural rate of growth • Aggregate demand • Endogeneity

JEL classification: E10, E32, O40

Manuscript received March 18, 2008; final version received November 27, 2008.


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