The European Journal of Comparative Economics

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EJCE Year: 2018, June. Volume: 15 - Issue: 1

Secular decline in profit rates: time series analysis of a classical hypothesis

by Ivan D. Trofimov

Start page: 83 - End page: 118

Keywords: Profit rates, time series, unit root, trend estimation, classical political economy

Jel code: B5; C22; P17

DOI: 10.25428/1824-2979/201801-83-118

Abstract:

Recent global financial crisis and ongoing turbulence in the global economy revived interest in the classical hypothesis of declining profit rates and vanishing profit opportunities as one of the reasons of economic instabilities. This paper, while not joining theoretical debate on the driving factors of profit rates’ decline, reconsiders empirically the hypothesis of the secular decline in economy-wide profit rates. A panel of unit root tests is used and deterministic and stochastic trend models (with or without structural breaks) are estimated. It is shown that instead of continuous downward trend, profit rates exhibit diverse dynamics – random walk, deterioration with breaks, reversals, or the absence of trend. Likewise, it is shown in an exploratory analysis that a variety of factors were determining profit rates, with capital productivity and competitive dynamics in the economy likely being the most salient.

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