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Elasticities, markups and technical progress: evidence from a state-space approach

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  • Colin Ellis

Abstract

Conventional techniques for estimating the elasticity of substitution between capital and labour in the production process typically focus on factor-demand equations. An implicit assumption in this approach is normally that the markup is stationary. But that may not be true. This paper considers a new approach that models the markup as an unobserved variable. Using the factor-demand equations for capital and labour, technical progress can also be estimated as a stochastic process, rather than just imposing a time trend. The resulting estimates of the whole-economy markup for the UK economy suggest that it has fallen over the past 30 years, and this result appears to withstand a variety of robustness checks. The estimated elasticity is somewhat lower than most previous estimates. This implies that conventional techniques may be misleading.

Suggested Citation

  • Colin Ellis, 2006. "Elasticities, markups and technical progress: evidence from a state-space approach," Bank of England working papers 300, Bank of England.
    • Handle: RePEc:boe:boeewp:300
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    2. Colin Ellis, 2017. "Scenario-based stress tests: are they painful enough?," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 11(2), June.
    3. Mustafa Utku Özmen, 2020. "In Pursuit Of Understanding Markups In Restaurant Services Prices," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(06), pages 1423-1437, December.
    4. Danny Leung, 2008. "Markups in Canada: Have They Changed and Why?," Staff Working Papers 08-7, Bank of Canada.
    5. Paul Middleditch, 2010. "A New Keynesian Model with Heterogeneous Price Setting," Centre for Growth and Business Cycle Research Discussion Paper Series 150, Economics, The University of Manchester.
    6. J. Stephen Ferris, 2012. "The Relationship Between Government Size and Economic Performance with Particular Application to New Zealand," Carleton Economic Papers 12-06, Carleton University, Department of Economics, revised 25 Apr 2013.
    7. Tom Holden, 2010. "Products, patents and productivity persistence: A DSGE model of endogenous growth," Economics Series Working Papers 512, University of Oxford, Department of Economics.
    8. Mr. Benjamin L Hunt, 2007. "U.K. Inflation and Relative Prices over the Last Decade: How Important was Globalization?," IMF Working Papers 2007/208, International Monetary Fund.
    9. Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers 1412, School of Economics, University of Surrey.
    10. Harrison, Richard & Oomen, Özlem, 2010. "Evaluating and estimating a DSGE model for the United Kingdom," Bank of England working papers 380, Bank of England.
    11. Parente, Stephen & Desmet, Klaus, 2009. "The Evolution of Markets and the Revolution of Industry: A Quantitative Model of England's Development, 1300-2000," CEPR Discussion Papers 7290, C.E.P.R. Discussion Papers.
    12. Khan, Hashmat & Kim, Bae-Geun, 2013. "Markups and oil prices in Canada," Economic Modelling, Elsevier, vol. 30(C), pages 799-813.

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