Forecasting income shares: are mean-reversion assumptions appropriate?

David Griffiths ()

Applied Economics, 2007, vol. 39, issue 21, 2699-2711

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.

Date: 2007
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DOI: 10.1080/00036840600722299

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