Revisiting the Great Ratios Hypothesis

Chudik, Alexander; Pesaran, M. Hashem; Smith, Ron P.

doi:10.24149/gwp415r1

Working Paper Revision

Revisiting the Great Ratios Hypothesis

Abstract: Kaldor called the constancy of certain ratios stylized facts, whereas Klein and Kosobud called them great ratios. While they often appear in theoretical models, the empirical literature finds little evidence for them, perhaps because the procedures used cannot deal with lack of cointegration, two-way causality and cross-country error dependence. We propose a new system pooled mean group estimator that can deal with these features. Monte Carlo results show it performs well compared with other estimators, and using it on a dataset over 150 years and 17 countries, we find support for five of the seven ratios considered.

Keywords: great ratios; heterogeneous panels; cointegration; two-way long-run causality; error cross-sectional dependence;

JEL Classification: B4; C18; C33; C5;

https://doi.org/10.24149/gwp415r1