Saturday, 27 March 2010: 09:20
Some Robust Estimates of the Elasticity of Substitution
The importance of obtaining reliable estimates of the elasticity of substitution can hardly be overstated. The effectiveness of fiscal policy (se, e.g. Hall and Jorgenson (1967), Eisner and Nadiri (1968), Chirinko (2002)), the impact of capital stock on the unemployment rate (see, e.g. Rowthorn (1999)), the dynamics of technical change(see, e.g. Acemoglu (2003)), movements in income shares (see, e.g. Blanchard (1977)), Caballero and Hamour (1998)), trade patterns (see e.g. Jones (1965)) etc depend on the magnitude of the elasticity of substitution.
Most studies rely for estimation purposes on the CES model, Arrow et al. (1961). During the last few years a number of studies have attempted to examine whether the elasticity of substitution and/ or the technical progress parameters are shifting over time. In this research we examine this possibility utilizing a panel of developed economies. Various formulations of the model are estimated (demand for labor, demand for capital, the production function itself) under alternative specifications of the error structure. The results indicate small, but statistically significant shifts of these parameters over time.
JEL classification numbers C10, O10, O50
The importance of obtaining reliable estimates of the elasticity of substitution can hardly be overstated. The effectiveness of fiscal policy (se, e.g. Hall and Jorgenson (1967), Eisner and Nadiri (1968), Chirinko (2002)), the impact of capital stock on the unemployment rate (see, e.g. Rowthorn (1999)), the dynamics of technical change(see, e.g. Acemoglu (2003)), movements in income shares (see, e.g. Blanchard (1977)), Caballero and Hamour (1998)), trade patterns (see e.g. Jones (1965)) etc depend on the magnitude of the elasticity of substitution.
Most studies rely for estimation purposes on the CES model, Arrow et al. (1961). During the last few years a number of studies have attempted to examine whether the elasticity of substitution and/ or the technical progress parameters are shifting over time. In this research we examine this possibility utilizing a panel of developed economies. Various formulations of the model are estimated (demand for labor, demand for capital, the production function itself) under alternative specifications of the error structure. The results indicate small, but statistically significant shifts of these parameters over time.
JEL classification numbers C10, O10, O50