Elasticities, markups and technical progress: evidence from a state-space approach
AbstractConventional techniques for estimating the elasticity of substitution between capital and labour in the production process typically focus on factor-demand equations. An implicit assumption in this approach is normally that the markup is stationary. But that may not be true. This paper considers a new approach that models the markup as an unobserved variable. Using the factor-demand equations for capital and labour, technical progress can also be estimated as a stochastic process, rather than just imposing a time trend. The resulting estimates of the whole-economy markup for the UK economy suggest that it has fallen over the past 30 years, and this result appears to withstand a variety of robustness checks. The estimated elasticity is somewhat lower than most previous estimates. This implies that conventional techniques may be misleading.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of England in its series Bank of England working papers with number 300.
Date of creation: Jul 2006
Date of revision:
Contact details of provider:
Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
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.:
- Campbell Leith & Jim Malley, 2003.
"A Sectoral Analysis of Price-Setting Behavior in US Manufacturing Industries,"
CESifo Working Paper Series
984, CESifo Group Munich.
- Campbell Leith & Jim Malley, 2007. "A Sectoral Analysis of Price-Setting Behavior in U.S. Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 335-342, May.
- Campbell Leith & Jim Malley, . "A Sectoral Analysis of Price-Setting Behavior in US Manufacturing Industries," Working Papers, Business School - Economics, University of Glasgow 2003_7, Business School - Economics, University of Glasgow, revised May 2003.
- Charlotta Groth, 2005. "Estimating UK capital adjustment costs," Bank of England working papers, Bank of England 258, Bank of England.
- Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers, Bank of England 62, Bank of England.
- Hashmat Khan & Richhild Moessner, 2005. "Competitiveness, inflation, and monetary policy," Bank of England working papers, Bank of England 246, Bank of England.
- Robert S. Chirinko & Steven M. Fazzari & Andrew P. Meyer, 2004. "That Elusive Elasticity: A Long-Panel Approach to Estimating the Capital-Labor Substitution Elasticity," CESifo Working Paper Series 1240, CESifo Group Munich.
- Smith, Peter N., 2000. "Output price determination and the business cycle," Economic Modelling, Elsevier, Elsevier, vol. 17(1), pages 49-69, January.
- Gagnon, Edith & Khan, Hashmat, 2005. "New Phillips curve under alternative production technologies for Canada, the United States, and the Euro area," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1571-1602, August.
- Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(3), pages 361-68, July.
- Colin Ellis & Simon Price, 2004. "UK Business Investment and the User Cost of Capital," Manchester School, University of Manchester, vol. 72(s1), pages 72-93, 09.
- Colin Ellis & Simon Price, 2003. "The impact of price competitiveness on UK producer price behaviour," Bank of England working papers, Bank of England 178, Bank of England.
- Davidson, James, 1994. "Identifying Cointegrating Regressions by the Rank Condition," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(1), pages 105-10, February.
- Barrell, Ray & Pain, Nigel, 1997. "Foreign Direct Investment, Technological Change, and Economic Growth within Europe," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(445), pages 1770-86, November.
- Bean, Charles R, 1994.
"European Unemployment: A Survey,"
Journal of Economic Literature,
American Economic Association, vol. 32(2), pages 573-619, June.
- Alogoskoufis, George & Martin, Christopher & Pittis, Nikitas, 1990. "Pricing and Product Market Structure in Open Economies: An Empirical Test," CEPR Discussion Papers, C.E.P.R. Discussion Papers 486, C.E.P.R. Discussion Papers.
- Jennifer V Greenslade & Richard G Pierse & Jumana Saleheen, 2003. "A Kalman filter approach to estimating the UK NAIRU," Bank of England working papers, Bank of England 179, Bank of England.
- Nicholas Oulton & Sylaja Srinivasan, 2003. "Capital stocks, capital services, and depreciation: an integrated framework," Bank of England working papers, Bank of England 192, Bank of England.
- Hasan Bakhshi & Jens Larsen, 2001. "Investment-specific technological progress in the United Kingdom," Bank of England working papers, Bank of England 129, Bank of England.
- Solow, Robert M., 1999. "Neoclassical growth theory," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 9, pages 637-667 Elsevier.
- Davidson, James, 1998. "Structural relations, cointegration and identification: some simple results and their application," Journal of Econometrics, Elsevier, Elsevier, vol. 87(1), pages 87-113, August.
- Susanto Basu & John G. Fernald & Nicholas Oulton & Sylaja Srinivasan, 2003. "The Case of the Missing Productivity Growth: Or, Does Information Technology Explain why Productivity Accelerated in the US but not the UK?," NBER Working Papers 10010, National Bureau of Economic Research, Inc.
- Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers, School of Economics, University of Surrey 1412, School of Economics, University of Surrey.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publications Team).
If references are entirely missing, you can add them using this form.