Integrated capital shares

Abstract

In empirical macroeconomics, inter-dependencies between countries are often analysed using cross-country correlations or graphical investigation of time series. This study shows that applying an alternative methodological approach - identification of common unobservable factors and using them as explanatory variables for country-specific time series - indicates a stronger cross-country integration of functional income distributions than the standard methods. The results vary only little between different samples, where both the country and year coverage change. Moreover, the main findings are not sensitive to the way capital depreciation is taken into account. The primary driving factor seems to be the same irrespective of the set of countries and time period. Furthermore, in the majority of the countries, this factor is strongly correlated with both trade openness and total factor productivity, which have been suggested to be key drivers behind the changes in the division of income between capital and labour.