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Steady-State Growth and the Elasticity of Substitution

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  • Andreas Irmen

Abstract

In a neoclassical economy with endogenous capital- and labor-augmenting technical change the steady-state growth rate of output per worker is shown to increase in the elasticity of substitution between capital and labor. This confirms the assessment of Klump and de La Grandville (2000) that the elasticity of substitution is a powerful engine of economic growth. However, unlike their findings my result applies to the steady-state growth rate. Moreover, it does not hinge on particular assumptions on how aggregate savings come about. It holds for any household sector allowing savings to grow at the same rate as aggregate output.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2955.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2955

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Keywords: capital accumulation; elasticity of substitution; direction of technical change; neoclassical growth model;

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References

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  1. de La Grandville, Olivier, 1989. "In Quest of the Slutsky Diamond," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 468-81, June.
  2. Andreas Irmen, 2010. "Steady-State Growth and the Elasticity of Substitution," CESifo Working Paper Series 2955, CESifo Group Munich.
  3. Revankar, Nagesh S, 1971. "A Class of Variable Elasticity of Substitution Production Functions," Econometrica, Econometric Society, Econometric Society, vol. 39(1), pages 61-71, January.
  4. Schlicht, Ekkehart, 2006. "A Variant of Uzawa's Theorem," Discussion Papers in Economics, University of Munich, Department of Economics 897, University of Munich, Department of Economics.
  5. Kaz Miyagiwa & Chris Papageorgiou, 2003. "Elasticity of substitution and growth: normalized CES in the Diamond model," Economic Theory, Springer, Springer, vol. 21(1), pages 155-165, 01.
  6. Irmen, Andreas, 2005. "Extensive and intensive growth in a neoclassical framework," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 29(8), pages 1427-1448, August.
  7. Kaz Miyagiwa & Chris Papageorgiou, 2007. "Endogenous Aggregate Elasticity of Substitution," Emory Economics, Department of Economics, Emory University (Atlanta) 0707, Department of Economics, Emory University (Atlanta).
  8. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, Springer, vol. 5(1), pages 87-120, March.
  9. Rainer Klump & Peter McAdam & Alpo Willman, 2004. "Factor Substitution and Factor Augmenting Technical Progress in the US: A Normalized Supply-Side System Approach," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c009_030, DEGIT, Dynamics, Economic Growth, and International Trade.
  10. Helmut Bester & Emmanuel Petrakis, . "Wages and Productivity Growth in a Competitive Industry," Papers, Departmental Working Papers 009, Departmental Working Papers.
  11. Hellwig, Martin & Irmen, Andreas, 2001. "Endogenous Technical Change in a Competitive Economy," Journal of Economic Theory, Elsevier, Elsevier, vol. 101(1), pages 1-39, November.
  12. Klump, Rainer & Saam, Marianne, 2006. "Calibration of normalised CES production functions in dynamic models," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 06-78, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  13. Andreas Irmen & Rainer Klump, 2009. "Factor Substitution, Income Distribution and Growth in a Generalized Neoclassical Model," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 10, pages 464-479, November.
  14. Chris Papageorgiou & Marianne Saam, . "Two-Level CES Production Technology in the Solow and Diamond Growth Models," Departmental Working Papers, Department of Economics, Louisiana State University 2005-07, Department of Economics, Louisiana State University.
  15. repec:ebl:ecbull:v:5:y:2006:i:6:p:1-5 is not listed on IDEAS
  16. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
  17. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 102(1), pages 41-56, March.
  18. Xue, Jianpo & Yip, Chong K., 2012. "Factor Substitution And Economic Growth: A Unified Approach," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 16(04), pages 625-656, September.
  19. Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 282-291, March.
  20. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages 1008-38, October.
  21. Charles I. Jones & Dean Scrimgeour, 2008. "A New Proof of Uzawa's Steady-State Growth Theorem," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 180-182, February.
  22. de La Grandville, Olivier, 1989. "Erratum [In Quest of the Slutsky Diamond]," American Economic Review, American Economic Association, American Economic Association, vol. 79(5), pages 1307, December.
  23. Daron Acemoglu, 2003. "Labor- And Capital-Augmenting Technical Change," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(1), pages 1-37, 03.
  24. Saam, Marianne, 2008. "Openness to trade as a determinant of the macroeconomic elasticity of substitution," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(2), pages 691-702, June.
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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, DEGIT, Dynamics, Economic Growth, and International Trade c017_011, DEGIT, Dynamics, Economic Growth, and International Trade.
  2. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2011. "The normalized CES production function: theory and empirics," Working Paper Series, European Central Bank 1294, European Central Bank.
  3. Temple, Jonathan, 2012. "The calibration of CES production functions," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(2), pages 294-303.
  4. Andreas Irmen, 2010. "Steady-State Growth and the Elasticity of Substitution," CREA Discussion Paper Series 10-21, Center for Research in Economic Analysis, University of Luxembourg.
  5. T.V.S.Ramamohan Rao, 2011. "Contemporary Relevance and Ongoing Controversies Related to the CES Production Function," Journal of Quantitative Economics, The Indian Econometric Society, The Indian Econometric Society, vol. 9(2), pages 36-57, July.
  6. Antony, Jürgen, 2014. "Technical change and the elasticity of factor substitution," Beiträge der Hochschule Pforzheim 147, Pforzheim University.
  7. Debdulal Mallick, 2012. "Education Briefing: The role of capital-labour substitution in economic growth," Indian Growth and Development Review, Emerald Group Publishing, Emerald Group Publishing, vol. 5(1), pages 89-101, April.
  8. Andreas Irmen, 2013. "A Generalized Steady-State Growth Theorem," CREA Discussion Paper Series 13-26, Center for Research in Economic Analysis, University of Luxembourg.
  9. Yoseph Yilma Getachew, 2011. "Public Investment Policy, Distribution, and Growth: What Levels of Redistribution through Public Investment Maximize Growth?," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c016_072, DEGIT, Dynamics, Economic Growth, and International Trade.

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