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Aggregate returns to scale: why measurement is imprecise

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Author Info
Harold L. Cole
Lee E. Ohanian

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Abstract

The extent to which there are aggregate returns to scale at the level of aggregate production has important implications both for the types of shocks generating business cycles and for optimal policy. However, prior attempts to measure the extent of these returns using instrumental variable techniques have yielded quite imprecise estimates. In this article, we show that the production shocks implied by a range of returns to scale that encompasses both large increasing returns and large decreasing returns are almost identical. This makes clear that there is a fundamental reason for the imprecision of prior estimates and casts doubt on our ability to generate more precise estimates

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Publisher Info
Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1999)
Issue (Month): Sum ()
Pages: 19-28
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Handle: RePEc:fip:fedmqr:y:1999:i:sum:p:19-28:n:v.23no.3

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Keywords: Business cycles;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22. [Downloadable!]
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  2. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June. [Downloadable!] (restricted)
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  3. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital utilization and returns to scale," Working Paper Series, Macroeconomic Issues 95-5, Federal Reserve Bank of Chicago.
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  4. Marianne Baxter & Robert G. King, 1991. "Productive externalities and business cycles," Discussion Paper / Institute for Empirical Macroeconomics 53, Federal Reserve Bank of Minneapolis. [Downloadable!]
  5. Harold L. Cole & Lee E. Ohanian, 1996. "Reassessing aggregate returns to scale with standard theory and measurement," Working Papers 566, Federal Reserve Bank of Minneapolis. [Downloadable!]
  6. Kamihigashi, Takashi, 1996. "Real business cycles and sunspot fluctuations are observationally equivalent," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 105-117, February. [Downloadable!] (restricted)
  7. Ellen R. McGrattan, 1994. "A progress report on business cycle models," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-16. [Downloadable!]
  8. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 719-51, August. [Downloadable!] (restricted)
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  1. Harrison, Sharon G & Weder, Mark, 2002. "Did Sunspot Forces Cause the Great Depression?," CEPR Discussion Papers 3267, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Weder, Mark, 2003. "Taylor Rules in Practice: How Central Banks can Intercept Sunspot Expectations," CEPR Discussion Papers 3899, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Mark Weder, 2004. "Taylor Rules: intercepting expectations," Money Macro and Finance (MMF) Research Group Conference 2003 110, Money Macro and Finance Research Group. [Downloadable!]
  4. Andreas Beyer & Roger E.A. Farmer, 2003. "On the indeterminacy of determinacy and indeterminacy," Working Paper Series 277, European Central Bank. [Downloadable!]
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  5. Andreas Beyer & Roger E. A. Farmer, 2004. "On the Indeterminacy of New-Keynesian Economics," Computing in Economics and Finance 2004 152, Society for Computational Economics. [Downloadable!]
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  6. Jang-Ting Guo & Kevin Lansing, 1999. "Fiscal policy, increasing returns, and endogenous fluctuations," Working Papers in Applied Economic Theory 99-08, Federal Reserve Bank of San Francisco. [Downloadable!]
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  7. Weder, Mark, 2004. "A Heliocentric Journey into Germany's Great Depression," CEPR Discussion Papers 4191, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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