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Forecasting income shares: are mean-reversion assumptions appropriate?

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  • David Griffiths

Abstract

The article examines some statistical evidence that supports the view that US labour and capital shares of income return to some long-run historical values. We estimate the long-run share values and the length of time it takes to converge to them. We account for the interdependence of the shares by using a vector error-correction model, and this specification is tested against a VAR alternative using Johansen's method to characterize the properties of the cointegrating vector. We find support for the idea that labour and capital shares have historically been mean reverting, in spite of the fairly restrictive assumptions implied when invoking the Cobb-Douglas production function as the rationale. The cumulative impulse response functions indicate that for capital and labour shares, the time required to revert back to long run levels is in the order of thirty quarters.

Suggested Citation

  • David Griffiths, 2007. "Forecasting income shares: are mean-reversion assumptions appropriate?," Applied Economics, Taylor & Francis Journals, vol. 39(21), pages 2699-2711.
    • Handle: RePEc:taf:applec:v:39:y:2007:i:21:p:2699-2711
    DOI: 10.1080/00036840600722299
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    References listed on IDEAS

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    1. David Harvey & Terence Mills, 2005. "Evidence for common features in G7 macroeconomic time series," Applied Economics, Taylor & Francis Journals, vol. 37(2), pages 165-175.
    2. David Griffiths, 2004. "The big problem of forecasting small change," Applied Economics, Taylor & Francis Journals, vol. 36(19), pages 2195-2207.
    3. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    4. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    5. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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