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Macroeconomic Profitability: Theory and Evidence


  • Thomas R. Michl


This paper gives an account of recent work on the measurement, statistical analysis, and theoretical analysis of macroeconomic profitability. Measurement issues include the treatment of holding gains on physical assets and net financial liabilities, national income accounting practices and recent revisions, and the use of accounting rates of return. Statistical work has focused on the identification of trends and shifts in profit rates not caused by cyclical fluctuations, and various theoretical explanations have been offered for the generally low rates of return that appeared in the 1970s. These include capital deepening stimulated by a reduction in the cost of capital funds; profit squeezes caused by some combination of slower productivity growth, real wage push, and raw material price inflation; declining capital productivity; and changes in effective tax rates. The paper raises several questions. The use of a constant mark-up pricing model in reduced form to control for cyclical effects on profitability is questioned because of evidence that the mark-up is variable, and some suggestions for incorporating this evidence into applied studies of profitability are offered. Several empirical puzzles are identified. The apparent decline in capital productivity is one; the more pronounced decline in before-tax profitability compared to after-tax profitability is another.

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  • Thomas R. Michl, 1987. "Macroeconomic Profitability: Theory and Evidence," Economics Working Paper Archive wp_1, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_1

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    References listed on IDEAS

    1. Harcourt,G. C., 1972. "Some Cambridge Controversies in the Theory of Capital," Cambridge Books, Cambridge University Press, number 9780521096720, December.
    2. George M. Von Furstenberg, 1977. "Corporate Investment: Does Market Valuation Matter in the Aggregate?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 347-408.
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    Cited by:

    1. Carlos Esteban Posada, 1997. "Otro Costo De Una Inflación Perfectamente Prevista," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 16(31), pages 5-33, June.
    2. Carlos Esteban Posada, 1997. "Una Presentación Gráfica De La Nueva Teoría De La Política Anti-Inflacionaria Y El Caso Colombiano," BORRADORES DE ECONOMIA 003719, BANCO DE LA REPÚBLICA.
    3. Robert Amano & Tony S. Wirjanto, "undated". "The Dynamic Behaviour of Canadian Imports and the Linear-Quadratic Model: Evidence Based on the Euler Equation," Staff Working Papers 94-6, Bank of Canada.
    4. Eric M. Leeper & Tao Zha, 2001. "Assessing simple policy rules: a view from a complete macroeconomic model," Review, Federal Reserve Bank of St. Louis, issue jul, pages 83-112.
    5. K. Vela Velupillai, 2008. "The Mathematization of Macroeconomics: A Recursive Revolution," Department of Economics Working Papers 0807, Department of Economics, University of Trento, Italia.
    6. Arturo Estrella, 2007. "Extracting business cycle fluctuations: what do time series filters really do?," Staff Reports 289, Federal Reserve Bank of New York.
    7. Guay, A & St-Amant, P, 1996. "Do Mechanical Filters Provide a Good Approximation of Business Cycles?," Working Papers-Department of Finance Canada 1996-2, Department of Finance Canada.
    8. McAndrews, James & Roberds, William, 1999. "A General Equilibrium Analysis of Check Float," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 353-377, October.
    9. Richard Jenner, 2004. "Real Wages, Business Cycles and New Production Patterns," Small Business Economics, Springer, vol. 23(5), pages 441-452, November.

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