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In dubio pro CES - Supply estimation with mis-specified technical change

Author

Listed:
  • McAdam, Peter
  • Willman, Alpo
  • León-Ledesma, Miguel A.

Abstract

Capital-labor substitution and total factor productivity (TFP) estimates are essential features of growth and income distribution models. In the context of a Monte Carlo exercise embodying balanced and near balanced growth, we demonstrate that the estimation of the substitution elasticity can be substantially biased if the form of technical progress is misspecified. For some parameter values, when factor shares are relatively constant, there could be an inherent bias towards Cobb-Douglas. The implied estimates of TFP growth also yield substantially different results depending on the specification of technical progress. A Constant Elasticity of Substitution production function is then estimated within a “normalized” system approach for the US economy over 1960:1–2004:4. Results show that the estimated substitution elasticity tends to be significantly lower using a factor augmenting specification (well below one). We are able to reject Hicks-, Harrod- and Solow-neutral specifications in favor of general factor augmentation with a non-negligible capital-augmenting component. Finally, we draw some important lessons for production and supply-side estimation. JEL Classification: C15, C32, E23, O33, O51

Suggested Citation

  • McAdam, Peter & Willman, Alpo & León-Ledesma, Miguel A., 2010. "In dubio pro CES - Supply estimation with mis-specified technical change," Working Paper Series 1175, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20101175
    Note: 50336
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Szomolányi, Karol & Lukáčik, Martin & Lukáčiková, Adriana, 2018. "Elasticity of Substitution in Post-Communist Economies," Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference (2018), Split, Croatia, in: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Split, Croatia, 6-8 September 2018, pages 105-111, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb.
    2. Cristiano Cantore & Paul Levine & Giovanni Melina, 2014. "A Fiscal Stimulus and Jobless Recovery," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(3), pages 669-701, July.
    3. Neil Rankin & Rulof Burger & Friedrich Kreuser, 2015. "The elasticity of substitution and labour-displacing technical change in post-apartheid South Africa," WIDER Working Paper Series 101, World Institute for Development Economic Research (UNU-WIDER).
    4. McAdam, Peter & Willman, Alpo & León-Ledesma, Miguel A., 2011. "Aggregation, the skill premium, and the two-level production function," Working Paper Series 1400, European Central Bank.
    5. Matteo F. Ghilardi & Raffaele Rossi, 2014. "Aggregate Stability and Balanced‐Budget Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1787-1809, December.
    6. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
    7. PETER McADAM & ALPO WILLMAN, 2013. "Technology, Utilization, and Inflation: What Drives the New Keynesian Phillips Curve?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1547-1579, December.
    8. Zhu, Xuehong & Zeng, Anqi & Zhong, Meirui & Huang, Jianbai, 2021. "Elasticity of substitution and biased technical change in the CES production function for China's metal-intensive industries," Resources Policy, Elsevier, vol. 73(C).
    9. Alpo Willman & Miguel A. León-Ledesma & Peter McAdam, 2012. "Explaining the Skill Premium: Technical Change or Capita-Skill Complements?," EcoMod2012 4356, EcoMod.
    10. Jakub Growiec, 2012. "The World Technology Frontier: What Can We Learn from the US States?-super-," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(6), pages 777-807, December.
    11. Timothy J. Garrett & Matheus R. Grasselli & Stephen Keen, 2020. "Past production constrains current energy demands: persistent scaling in global energy consumption and implications for climate change mitigation," Papers 2006.03718, arXiv.org.
    12. Song, Malin & Wang, Shuhong, 2016. "Can employment structure promote environment-biased technical progress?," Technological Forecasting and Social Change, Elsevier, vol. 112(C), pages 285-292.
    13. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.

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    More about this item

    Keywords

    Balanced Growth; Constant Elasticity of Substitution; factor-augmenting technical change; Factor Income share; Technical Progress Neutrality;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada

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