Saturday, January 18, 2014

World Bank thinks contraction in developing countries is good

The World Bank suggests that the slowdown in the periphery is good, since it has moved several countries from a positive output gap, with excess demand, to sustainable positions with negative output gaps, as shown in the graph below (h/t Otaviano Canuto; source here).
Note that Brazil, China, and India are in this category. Argentina still has excess demand. Potential GDP, which given Okun's Law imply a certain level of unemployment and connect the concept with the other neoclassical standard assumption of a natural rate of unemployment, are quite low in many developing countries if you believe the World Bank.

These are, in the World Bank's view, of course, supply side constraints that are not affected in any way by demand forces, even if the evidence in favor of the accelerator, which suggests that capacity adjusts to demand, is overwhelming.

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