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Testing the Balanced Growth Hypothesis in the Presence of Structural Breaks: Evidence from Developed and Developing Countries

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  • Arjun
  • Bibhuti Ranjan Mishra

Abstract

The balanced growth theory and the neoclassical growth model predict that certain macroeconomic variables such as output, consumption, and investment grow at a constant rate. Analytically, it indicates that the consumption-output ratio and the investment-output ratio (termed "great ratios") must be stationary. Moreover, consumption and investment must be cointegrated with output. This paper examines these implications with respect to developed (G7) and emerging (E7) countries using data for the period 1970-2019. The validity of the balanced growth hypothesis (BGH) is tested by using unit root tests (univariate analysis) and cointegration techniques (multivariate analysis) that permits endogenously determined structural breaks. The findings of our univariate analysis suggest limited evidence of the BGH in developed and developing countries. The multivariate analysis exhibits more supportive evidence of the BGH in five developed countries and limited evidence for two developing countries. The study also employs the Westerlund (2006) panel cointegration test with structural breaks to examine the validity of the BGH. Empirical findings validate the BGH for the G7 countries, while it is not validated for E7 countries. In sum, the study promulgates the use of structural breaks in a multivariate setup in testing the BGH to find robust evidence.

Suggested Citation

  • Arjun & Bibhuti Ranjan Mishra, 2024. "Testing the Balanced Growth Hypothesis in the Presence of Structural Breaks: Evidence from Developed and Developing Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2024(1), pages 1-35.
    • Handle: RePEc:prg:jnlpep:v:2024:y:2024:i:1:id:849:p:1-35
    DOI: 10.18267/j.pep.849
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    References listed on IDEAS

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    More about this item

    Keywords

    balanced growth; great ratios; structural breaks; E7 and G7 countries;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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