Uncertainty and capacity constraints: Reconsidering the aggregate production function
AbstractThe CobbDouglas function is today one of the most widely adopted assumptions in economic modeling, yet both its theoretical and empirical bases have long been under question. This paper builds an alternative function on very different (albeit also neoclassical) microfoundations aimed at both addressing those theoretical drawbacks and providing a better empirical fit than the CobbDouglas formula. The new model, unlike the CobbDouglas function, does not portray installed capacity as aggregate capital but as a sunk cost generating economic rents. An analysis of 1949-2008 annual U.S. growth data suggest this alternative model explains nearly 85 percent of GDP fluctuations and is empirically more robust than the CobbDouglas, whilst both contemporary and lagged aggregate capital are statistically rejected as explanatory variables. This lends support to the old Cambridge Critique”, according to which using value-weighted capital aggregates to explain production simply makes no sense. At face value, these results not only pose a question on any macroeconomic model assuming a CobbDouglas function but also point towards an alternative interpretation of phenomena such as the way monetary policy impacts productivity. --
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Bibliographic InfoArticle provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.
Volume (Year): 5 (2011)
Issue (Month): 19 ()
production function; CobbDouglas; capital controversy;
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
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.:
- Avi J. Cohen, 2003. "Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies?," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 199-214, Winter.
- Mizon, Grayham E & Richard, Jean-Francois, 1986. "The Encompassing Principle and Its Application to Testing Non-nested Hypotheses," Econometrica, Econometric Society, vol. 54(3), pages 657-78, May.
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