Balanced growth and the great ratios: New evidence for the US and UK

Standard macroeconomic models suggest that the ‘great ratios’ of consumption to output and investment to output should be stable functions of structural parameters. We examine whether the ratios are stationary for the US and UK, allowing for structural breaks that could reflect time-varying parameters. We find stronger evidence for stationarity than previous work. We then use the long-run restrictions associated with the stationarity of the great ratios to extract measures of trend output from the joint behavior of consumption, investment and output. This approach is attractive because it uses information from several series without requiring restrictive assumptions.