The Road to Recovery: How and Why Economic Policy Must Change

Appendix 1

Mean Reversion of US Profit Margins

By James Mitchell

Using the annual data for US corporate profit margins, which we have from 1929 to 2011, the Augmented Dickey–Fuller (ADF) test statistic is – 4.683. This is a clear rejection of nonstationarity (the associated p-value is 0.000) and therefore indicates that US profit margins are mean reverting. While many statistical tests for nonstationarity, or indeed stationarity, exist, the ADF test remains an important benchmark. We operationalise the ADF test by using a statistical criterion (the Bayesian Information Criterion) to choose the lag length in the dynamic univariate regression underlying the test.