The aim of this paper is twofold. On the one hand, it is investigated which is the effect of macroeconomic factors in income growth, as defined by IS-LM, and on the other hand it is examined which is the relation between these factors and economic cycles. The aim of this paper goes further and examines whether the magnitude of the effect of these factors to GDP growth remains intact over time. The examination periods includes the years 1930-1949, 1950-1979 and 1980-2008. According to the results of the analysis, the government consumption expenditure growth is the most important factor that affects positively GDP growth. A change by 10% of Government consumption leads to 1.65% GDP growth. It is also examined which is the effect of Personal consumption expenditures to gross domestic product growth by breaking down personal consumption components, namely consumption for Durable goods, consumption for Nondurable goods and consumption for Services. A change in demand for Nondurable goods is found to be the major factor that affects GDP growth. This study also shows that the duration of crises is adversely affected by lowering interest rates while being equally affected by government consumption and private investments even after adjusting for different time periods. However, the effect of these factors is somewhat smaller after 1950, maybe due to increasing globalisation. The findings are interesting for policy makers. The empirical findings of this study indicate that the role of private investments for GDP growth may be over-rated among policy makers, given the low contribution of this factor to GDP growth. On the contrary, policies that aim in increasing role of the state may lead to higher GDP growth and smaller economic crises. In line with other studies it is also found that interest rate policy affects the duration of economic cycles. However it is found that there is no effect on long-term growth.
|Number of pages||8|
|Journal||International Research Journal of Finance and Economics|
|Publication status||Published - Jun 2010|
- Business cycles
- Government expenditure