Working Paper: CEPR ID: DP4796
Authors: Clifford Attfield; Jonathan Temple
Abstract: Standard macroeconomic models suggest that the ?great ratios? of consumption to output and investment to output should be stationary. The joint behaviour of consumption, investment and output can then be used to measure trend output. We adopt this approach for the USA and UK, and find support for stationarity of the great ratios when structural breaks are taken into account. From the estimated vector error correction models, we extract multivariate estimates of the permanent component in output, and comment on trend growth in the 1980s and the New Economy boom of the 1990s.
Keywords: great ratios; new economy; permanent components; structural breaks; trend output
JEL Codes: C32; C51; E20; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumption (E21) | Output (Y10) |
| Investment (G31) | Output (Y10) |
| Consumption/Output Ratio (E23) | Output (Y10) |
| Investment/Output Ratio (E22) | Output (Y10) |
| Shocks to Ratios (F31) | Output (Y10) |
| Structural Breaks (C22) | Stationarity of Ratios (C22) |
| Joint Behavior of Consumption, Investment, and Output (E20) | Trend Output (Y10) |