Is the Output–Capital Ratio Constant in the Very Long Run?

27 Pages Posted: 22 Feb 2012

See all articles by Jakob B. Madsen

Jakob B. Madsen

University of Copenhagen - Department of Economics

Vinod Mishra

Monash Business School

Russell Smyth

Monash University - Department of Economics

Date Written: March 2012

Abstract

A key prediction of standard models of economic growth is that the output–capital ratio is constant along the economy's balanced growth path. Using data for 16 OECD countries over 135 years we examine whether the output–capital ratio reverts to a constant in the long run using univariate and panel stationarity tests with structural breaks. Univariate stationarity tests with one break provide more evidence of trend reversion than mean reversion. However, in stationarity tests with two breaks and with up to five breaks, the results are largely independent of the inclusion of a trend. When we allow for up to five breaks in the intercept we find that for 12 of the 16 countries, the output–capital ratio is mean reverting and when we allow for up to five breaks in the intercept for 11 of the 16 countries, the output–capital ratio is trend reverting. We also find that for the panel as a whole the output–capital ratio is mean reverting and trend reverting when we allow for up to five breaks.

Suggested Citation

Madsen, Jakob Bruechner and Mishra, Vinod and Smyth, Russell, Is the Output–Capital Ratio Constant in the Very Long Run? (March 2012). The Manchester School, Vol. 80, Issue 2, pp. 210-236, 2012, Available at SSRN: https://ssrn.com/abstract=2009209 or http://dx.doi.org/10.1111/j.1467-9957.2010.02222.x

Jakob Bruechner Madsen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Vinod Mishra

Monash Business School ( email )

Monash University
Clayton, Victoria 3800
Australia
+61 03 99050038 (Phone)

HOME PAGE: http://users.monash.edu.au/~mishra/

Russell Smyth

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

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