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Is The Output-Capital Ratio Constant In The Very Long Run?

  • Jakob Madsen
  • Russell Smyth

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 unit root tests with one and two breaks in the mean suggest that, in most circumstances, the output-capital ratio fails to revert towards a mean. However, when we allow for up to five breaks in the mean we find that for 15 of the 16 countries, the output-capital ratio is stationary and that the output-capital ratio is also panel stationary.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2008/1008outputcapitalmadsensmyth.pdf
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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 10/08.

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Length: 18 pages
Date of creation: 01 May 2008
Date of revision:
Handle: RePEc:mos:moswps:2008-10
Contact details of provider: Postal: Department of Economics, Monash University, Victoria 3800, Australia
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Web page: http://www.buseco.monash.edu.au/eco/
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  1. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
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  6. D'Adda, Carlo & Scorcu, Antonello E., 2003. "On the time stability of the output-capital ratio," Economic Modelling, Elsevier, vol. 20(6), pages 1175-1189, December.
  7. Clemente, Jesus & Montanes, Antonio & Reyes, Marcelo, 1998. "Testing for a unit root in variables with a double change in the mean," Economics Letters, Elsevier, vol. 59(2), pages 175-182, May.
  8. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  9. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
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