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Indeterminacy and the elasticity of substitution in one-sector models

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  • Wong, Tsz-Nga
  • Yip, Chong K.

Abstract

This paper introduces a new production externality via factor substitution and explores its effects on generating indeterminacy in one-sector growth models. With the elasticity of substitution depends on the average level of capital intensity, indeterminacy is possible as long as the steady-state level of capital is below the normalized level of the CES production function. Given that the elasticity of factor substitution is decreasing in capital and the marginal product of capital is decreasing in terms of the elasticity, indeterminacy can occur because efficient factor substitution from capital deepening offsets the diminishing returns of capital.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 4 (April)
Pages: 623-635

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:4:p:623-635

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Elasticity of substitution Indeterminacy Normalized CES production function;

References

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Citations

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Cited by:
  1. Antony, Jürgen, 2014. "Technical change and the elasticity of factor substitution," Beiträge der Hochschule Pforzheim 147, Pforzheim University.
  2. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2011. "The normalized CES production function: theory and empirics," Working Paper Series 1294, European Central Bank.
  3. Jonathan R. W. Temple, 2008. "The Calibration of CES Production Functions," Bristol Economics Discussion Papers 08/606, Department of Economics, University of Bristol, UK.
  4. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on savings in a growth model," wp.comunite 0091, Department of Communication, University of Teramo.
  5. Jang-Ting Guo & Kevin J. Lansing, 2008. "Capital-labor substitution, equilibrium indeterminacy, and the cyclical behavior of labor income," Working Paper Series 2008-06, Federal Reserve Bank of San Francisco.
  6. Guo, Jang-Ting & Lansing, Kevin J., 2009. "Capital-labor substitution and equilibrium indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 1991-2000, December.
  7. Manuel Gómez, 2014. "Optimal size of the government: the role of the elasticity of substitution," Journal of Economics, Springer, vol. 111(1), pages 29-53, February.

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