This study attempts to identify the short- and long-run components of the Kaldor-Verdoorn (KV) law in empirical economics. The law claims that demand dynamics drive productivity dynamics. The law is tested with a panel of ten Central and Eastern-European countries, where labour productivity and demand growth have been slowing since 2004/2006 and where fears of an end of convergent growth are spreading. Meanwhile, the gradual slowing of output and productivity growth applies not only to the region considered in this study, but it is also a global phenomenon that is occurring despite remarkable technical progress and that is referred to as the so-called productivity puzzle. However, this puzzle would be solved in light of the KV law. To test for the short-term and long-term properties of this law, least squares and autoregressive distributed lag (ARDL) models are applied. Our results confirm the law for the region; slower productivity growth is not due to adverse technological progress but to weakening external and domestic demand.
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