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Cobb-Douglas production function revisited, VAR and VECM analysis and a note on Fischer/Cobb-Douglass paradox

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Listed:
  • Josheski, Dushko
  • Lazarov, Darko
  • Koteski, Cane

Abstract

Cobb-Douglas production function is a basic function in growth models. The modeling in this paper showed that VAR is stable; KPSS test showed that output, capital and labor are not trend stationary. Johansen’s co-integration test showed that a requirement for Fischer/Cobb-Douglass paradox to work is met at 3 lags, there factor shares are I(0). The Fisher/Cobb-Douglas Paradox is based on constant factor shares. (In terms of time-series analysis, such constancy is equivalent to factor shares being I(0). The Fisher/Cobb-Douglas Paradox is thus why the estimated σ equals unity independent of the underlying production technologies generating the simulated data.At 4 lags however these variables are I(1) variables i.e. Cobb-Douglass is not CES function anymore. ADF test for factors of production showed that natural logarithm of capital is stationary variable, while log of labor is not-stationary except at 10% level of significance. Adjustment parameters showed that labour responds more / faster than loutput (log of GDP) and lcapital on if there is change / shock in the system.VECM model failed the stability eingevalues test.

Suggested Citation

  • Josheski, Dushko & Lazarov, Darko & Koteski, Cane, 2011. "Cobb-Douglas production function revisited, VAR and VECM analysis and a note on Fischer/Cobb-Douglass paradox," MPRA Paper 33576, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:33576
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    References listed on IDEAS

    as
    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    2. F. A. Lutz, 1961. "The Theory of Capital," International Economic Association Series, Palgrave Macmillan, number 978-1-349-08452-4 edited by D. C. Hague, June.
    3. Nicholas Kaldor, 1961. "Capital Accumulation and Economic Growth," International Economic Association Series, in: D. C. Hague (ed.), The Theory of Capital, chapter 0, pages 177-222, Palgrave Macmillan.
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    More about this item

    Keywords

    Fisher/Cobb-Douglas Paradox; cointegration; VAR; VECM; ADF test ; unit root;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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