Is the Output-capital Ratio Constant in the Very Long Run?

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. * Department of Economics, Monash University; Economic Policy Research Unit and Finance Research Unit, Department of Economics, University of Copenhagen. ** Department of Economics, Monash University © 2008 Jakob B. Madsen and Russell Smyth All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior written permission of the author.