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Unwrapping some euro area growth puzzles: Factor substitution, productivity and unemployment

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  • Klump, Rainer
  • McAdam, Peter
  • Willman, Alpo

Abstract

In this paper, we estimate a long run supply-side system incorporating a CES production function with time-varying factor-augmenting technical progress for the euro area over the period 1970-2005. We find that the elasticity of substitution lies below unity at 0.7, that labor-augmenting technical progress is dominant in the long run while capital-augmenting technical progress plays an important role in the interim period. Importantly, we also find evidence of a structural break in the pattern of biased technical progress towards the end of the 1990s. Our results help to solve two puzzles in Europe's recent growth experience which differ markedly from the US experience. The first is related to the effects of the IT boom in the 1990s on productivity growth in Europe. The second puzzle concerns the changes in the "Okun's law" relationship, linking growth to the reduction of unemployment, which are observable in Europe since the late 1990s.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 2 (June)
Pages: 645-666

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:2:p:645-666

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Web page: http://www.elsevier.com/locate/inca/622617

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References

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  1. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
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  7. Mourre, Gilles, 2004. "Did the pattern of aggregate employment growth change in the euro area in the late 1990s?," Working Paper Series 0358, European Central Bank.
  8. Daron Acemoglu, 2001. "Directed Technical Change," NBER Working Papers 8287, National Bureau of Economic Research, Inc.
  9. Coenen, Günter & Wieland, Volker, 2002. "A Small Estimated Euro Area Model with Rational Expectations and Nominal Rigidities," CEPR Discussion Papers 3574, C.E.P.R. Discussion Papers.
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  12. Daron Acemoglu, 2003. "Labor- And Capital-Augmenting Technical Change," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 1-37, 03.
  13. Oliver J. Blanchard, 1997. "The Medium Run," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 89-158.
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  15. Marquetti, Adalmir A., 2003. "Analyzing historical and regional patterns of technical change from a classical-Marxian perspective," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 191-200, October.
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Citations

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Cited by:
  1. Jianpo Xue & Chong K. Yip, 2012. "Aggregate Elasticity of Substitution and Economic Growth: A Synthesis," DEGIT Conference Papers c017_011, DEGIT, Dynamics, Economic Growth, and International Trade.
  2. Andreas Irmen & Rainer Klump, 2007. "Factor Substitution, Income Distribution, and Growth in a Generalized Neoclassical Model," CESifo Working Paper Series 2148, CESifo Group Munich.
  3. Jochen Hartwig, 2014. "Testing Okun’s Law with Swiss Industry Data," KOF Working papers 14-357, KOF Swiss Economic Institute, ETH Zurich.
  4. 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.
  5. Saltari, Enrico & Federici, Daniela, 2013. "Elasticity of substitution and technical progress: Is there a misspecification problem?," MPRA Paper 52194, University Library of Munich, Germany.
  6. Luciano BOGGIO & Vincenzo DALL’AGLIO & Marco MAGNANI, 2010. "On Labour Shares in Recent Decades: A Survey," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 118(3), pages 283-333.
  7. Eric Miller, 2008. "An Assessment of CES and Cobb-Douglas Production Functions: Working Paper 2008-05," Working Papers 19992, Congressional Budget Office.

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