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Aggregation in models with quantity constraints: The CES aggregation function

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  • Horst Entorf

    ()
    (Department of Economics, University of WØrzburg, Sanderring 2, D-97070 WØrzburg, Germany IRES, DÊpartement des Sciences Economiques, UniversitÊ Catholique de Louvain, 3, place Montesquieu, B-1348 Louvain-la-Neuve, Belgium FacultÊ Libre des Sciences Economiques, F-59016 Lille, France)

  • Henri R. Sneessens

    ()
    (Department of Economics, University of WØrzburg, Sanderring 2, D-97070 WØrzburg, Germany IRES, DÊpartement des Sciences Economiques, UniversitÊ Catholique de Louvain, 3, place Montesquieu, B-1348 Louvain-la-Neuve, Belgium FacultÊ Libre des Sciences Economiques, F-59016 Lille, France)

Abstract

This paper is devoted to the problem of aggregation in models with quantity constraints. The focus is on quantity rationing macroeconomic (QRM) models where the micromarket outcome can be written as the minimum of several variables and where the diversity of situations across micromarkets is explicitly recognized. The aggregation result given in this paper generalizes that of Lambert (1988) to employment functions with more than two components, and leads to approximate aggregate functions of the CES variety. The approximation used can accomodate general variance-covariance structures. Simulation experiments show that the approximation error remains within reasonable bounds (1-4%). It thus seems that the CES formulation can accomodate a large variety of situations. It remains in particular valid when the (restrictive) conditions required to obtain the CES function as an exact result (independently and identically distributed Weibull variables) are not satisfied.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 25 (2000)
Issue (Month): 1 ()
Pages: 35-59

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Handle: RePEc:spr:empeco:v:25:y:2000:i:1:p:35-59

Note: received: July 1997/Final version received: March 1999
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Keywords: Macroeconomics; smoothing-by-aggregation; mismatch; approximation;

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  1. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  2. Fagnart, J.-Fr. & Licandro, O. & Sneessens, H. R., 1995. "Capacity Utilization and Market Power," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1996006, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  3. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  4. Eskil Heinesen, 1992. "CES Transaction Functions in Macroeconomic Rationing Models," Discussion Papers 92-07, University of Copenhagen. Department of Economics.
  5. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
  6. Heinesen, Eskil, 1995. "The two-variable CES transaction function in macroeconomic rationing models," Economics Letters, Elsevier, vol. 48(3-4), pages 257-265, June.
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