Hostname: page-component-5c6d5d7d68-sv6ng Total loading time: 0 Render date: 2024-08-13T13:09:43.872Z Has data issue: false hasContentIssue false
  • English
  • Français

ELASTICITY OF SUBSTITUTION AND TECHNICAL PROGRESS: IS THERE A MISSPECIFICATION PROBLEM?

Published online by Cambridge University Press:  15 August 2016

Daniela Federici  and
Enrico Saltari
Daniela Federici
Affiliation:
University of Cassino and Southern Lazio
Enrico Saltari*
Affiliation:
Sapienza University of Rome
*
Address correspondence to: Enrico Saltari, Dipartimento di Economia e Diritto, Sapienza Università di Roma, via del Castro Laurenziano 9, 00161 Rome, Italy; e-mail: enrico.saltari@uniroma1.it.
Get access Rights & Permissions [Opens in a new window]

Abstract

In previous work, we estimated a dynamic model of the Italian economy, showing that its weakness in the past two decades is mainly due to the slowdown in total factor productivity growth. In those models, two parameters play a key role: technological progress and the elasticity of substitution. Recent estimates of those parameters are affected, in our opinion, by a specification problem: technological parameters are inherently long-run but their estimates are based on short-run data. Looking deeply into the estimation procedure, we show that the misspecification issue present in the estimates gives rise to a spurious regression bias (high R2, low DW), because the standard approach does not incorporate frictions and rigidities. Our modeling strategy takes account of them. Although we cannot in general say that our framework gets rid of the serial correlation problem, the statistics for our model do show that residuals are not serially correlated.

Keywords

CES Production FunctionElasticity of SubstitutionIncome DistributionFactor-Augmenting Technical ProgressICT Technical Change
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 1: Current Macroeconomic Challenges , January 2018 , pp. 101 - 121
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We would like to thank Robert Chirinko, Giuseppe De Arcangelis, Kieran Donaghy, Giancarlo Gandolfo, Olivier de La Grandville and Clifford Wymer, and the participants to the workshop “Current Macroeconomic Challenges”, held in Rome, Sapienza University, March 7–8, 2014, as well as two anonymous referees for their useful comments and suggestions. The usual disclaimer applies.

References

REFERENCES

Acemoglu, Daron A. (2008) Introduction to Modern Economic Growth. Cambridge, MA: Massachusetts Institute of Technology.Google Scholar
Aghion, Philippe and Howitt, Peter W. (2009) The Economics of Growth. Cambridge, MA: Massachusetts Institute of Technology.Google Scholar
Antràs, Pol (2004) Is the US aggregate production function Cobb–Douglas? New estimates of the elasticity of substitution. Contributions to Macroeconomics 4 (1), Article 4.Google Scholar
Arrow, Kenneth J., Chenery, Hollis B., Minhas, Bagicha S., and Solow, Robert M. (1961) Capital–labor substitution and economic efficiency. Review of Economics and Statistics 43, 225–250.Google Scholar
Chirinko, Robert S. (2008) σ: The long and short of it. Journal of Macroeconomics 30 (2), 671–686.CrossRefGoogle Scholar
Chirinko, Robert S., Fazzari, Steven M., and Meyer, Andrew P. (1999) How responsive is business capital formation to its user cost? An exploration with micro data. Journal of Public Economics 74 (October), 53–80.Google Scholar
Colecchia, Alessandra and Schreyer, Paul (2001) The Impact of Information Communications Technology on Output Growth. STI working paper 2001/7, OECD, Paris.Google Scholar
Diamond, Peter A., McFadden, Daniel, and Rodriguez, Miguel (1978) Measurement of the elasticity of factor substitution and bias of technical change. In Fuss, M. and McFadden, D. (eds.), Production Economics: A Dual Approach to Theory and Applications, Vol. 2, pp. 125–147. Amsterdam: North-Holland.Google Scholar
Elsby, Michael W.L., Hobijn, Bart, and Şahin, Ayşegül (2013) The Decline of the U.S. Labor Share. Brookings papers on economic activity, Fall 2013.Google Scholar
European Commission (2013) Towards Knowledge Driven Reindustrialisation. European competitiveness report.Google Scholar
Gandolfo, Giancarlo (1981) Qualitative Analysis and Econometric Estimation of Continuous Time Dynamic Models. Amsterdam: North-Holland.Google Scholar
Hansen, Lars P. and Sargent, Thomas J. (2008) Robustness. Princeton, NJ: Princeton University Press.Google Scholar
Hicks, John R. (1932) The Theory of Wages. London: MacMillan & Co. Google Scholar
Jorgenson, Dale W., Ho, Mun S., and Stiroh, Kevin J. (2004) Will the U.S. productivity resurgence continue? Current Issues in Economics and Finance 10 (13), 1–7.Google Scholar
Kaldor, Nicholas (1957) A model of economic growth. Economic Journal 67, 591–624.Google Scholar
Kaldor, Nicholas (1961) Capital accumulation and economic growth. In Lutz, F.A. and Hague, D.C. (eds.), The Theory of Capital, pp. 177–222. New York: St. Martins Press.Google Scholar
Karabarbounis, Loukas and Neiman, Brent (2014) The global decline of the labor share. Quarterly Journal of Economics 129 (1), 61–103.Google Scholar
Klump, Reiner and de La Grandville, Olivier (2000) Economic growth and the elasticity of substitution: Two theorems and some suggestions. American Economic Review 90, 282–291.Google Scholar
Klump, Reiner, McAdam, Peter, and Willman, Alpo (2008) Unwrapping some Euro Area growth puzzles: Factor substitution, productivity and unemployment. Journal of Macroeconomics 30 (2), 645–666.Google Scholar
Klump, Reiner and Preissler, Harald (2000) CES production functions and economic growth. Scandinavian Journal of Economics 102, 41–56.Google Scholar
La Grandville, Olivier de (1989) In quest of the Slutsky diamond. American Economic Review 79, 468–481.Google Scholar
La Grandville, Olivier de (2009) Economic Growth: A Unified Approach. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
León-Ledesma, Miguel A., McAdam, Peter, and Willman, Alpo (2010) Identifying the elasticity of substitution with biased technical change. American Economic Review 100 (4), 1330–1357.CrossRefGoogle Scholar
Miyagiwa, Katz and Papageorgiou, Chris (2007) Endogenous aggregate elasticity of substitution. Journal of Economic Dynamics and Control 31 (9), 2899–2919.Google Scholar
Nelson, Richard R. (1965) The CES production function and economic growth. Review of Economics and Statistics 47 (3), 326–328.Google Scholar
Mallick, Debdulal (2012) The role of the elasticity of substitution in economic growth: A cross-country investigation. Labour Economics 19, 682–694.Google Scholar
McAdam, Peter and Willman, Alpo (2013). Medium run redux. Macroeconomic Dynamics 17 (4), 695–727.Google Scholar
Papageorgiou, Chris and Saam, Marianne (2008) Two-level CES production technology in the Solow and Diamond growth models. Scandinavian Journal of Economics 110 (1), 119–143.CrossRefGoogle Scholar
Pereira, Claudiney M. (2003) Empirical Essays on the Elasticity of Substitution, Technical Change, and Economic Growth. Ph.D. dissertation, North Carolina State University.Google Scholar
Robinson, Joan V. (1933) The Economics of Imperfect Competition. London: MacMillan & Co. (reprinted 1959).Google Scholar
Saltari, Enrico, Wymer, Clifford R., and Federici, Daniela (2013) The impact of ICT and business services on the Italian economy. Structural Change and Economic Dynamics 25, 110–118.Google Scholar
Saltari, Enrico, Wymer, Clifford R., Federici, Daniela, and Giannetti, Marilena (2012) Technological adoption with imperfect markets in the Italian economy. Studies in Nonlinear Dynamics and Econometrics 16, 2.Google Scholar
Solow, Robert M. (1957) Technical change and the aggregate production function. Review of Economics and Statistics 39, 312–320.CrossRefGoogle Scholar
Solow, R. M. (1987) Nobel Lecture, reprinted in Solow, R. M. (2000) Growth Theory: An Exposition, Chap. 1. Oxford University Press.Google Scholar
Stiroh, Kevin J. (2002) Information technology and the U.S. productivity revival: What do the industry data say? American Economic Review 92 (5), 1559–1576.Google Scholar
Timmer, Marcel P. and van Ark, Bart (2005) Does information and communication technology drive EU–US productivity growth differentials? Oxford Economic Papers 57 (4), 693–716.Google Scholar
Turnovsky, Stephen J. (2002) Intertemporal and intratemporal substitution and the speed of convergence in the neoclassical growth model. Journal of Economic Dynamics and Control 26, 1765–1785.Google Scholar
Wymer, Clifford R. (1972) Econometric estimation of stochastic differential equation systems. Econometrica 40, 565–577.Google Scholar
Wymer, Clifford R. (1996) The role of continuous time disequilibrium models in macroeconomics. In Barnett, W.A., Gandolfo, G., and Hillinger, C. (eds.), Dynamic Disequilibrium Modeling. Cambridge, UK: Cambridge University Press.Google Scholar
Wymer, C.R. (1997) Structural non-linear continuous-time models in econometrics. Macroeconomic Dynamics 1, 518–548.Google Scholar
Supplementary material: PDF

Federici and Saltari supplementary material

Online Appendix

Download Federici and Saltari supplementary material(PDF)
PDF 149.5 KB