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Econometric Foundations of the Great Ratios of Economics

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  • Don Harding

Abstract

We study the puzzle that econometric tests reject the great ratios hypothesis but economic growth theorists and quantitative macroeconomic model builders continue to embed that hypothesis in their work. We develop an econometric framework for the great ratios hypothesis and apply that framework to investigate the commonly used econometric techniques that produce rejection of the great ratios hypothesis. We prove that these methods cannot produce valid inference on the great ratios hypothesis. Thus we resolve the puzzle in favour of the growth theorists and quantitative macroeconomic model builders. We apply our framework to investigate the econometric basis for an influential paper that uses unit root and cointegration tests to reject the great ratios hypothesis for a vector that comprises consumption, financial wealth and labour income.

Suggested Citation

  • Don Harding, 2020. "Econometric Foundations of the Great Ratios of Economics," Centre of Policy Studies/IMPACT Centre Working Papers g-300, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:g-300
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    References listed on IDEAS

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    More about this item

    Keywords

    Great Ratios Hypothesis; Cointegration; Likelihood Ratio Inference;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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