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Aggregate Elasticity of Substitution and Economic Growth: A Synthesis

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  • Jianpo Xue
  • Chong K. Yip

Abstract

This paper examines the relation between aggregate elasticity of substitution (AES) and capital accumulation (the AES-K relation) in a general multi-sector Solow growth model with all CES production technologies. There are two intermediate goods produced by capital and labor, while the final good is produced by combining the two intermediate goods. When capital is sector-specific, then it is found that a positive AES-K relation emerges ony if the elasticity of substitution (ES) between capital and labor is of the same sign as the ES between the inter-mediate goods, but with the latter having a larger magnitude as required by the restriction of capital-skill complementarity. We also introduce the concepts of "global" versus "local" AES-capital relation and highlight that the AES findings of the existing literature are local ones. The general conclusion of our analysis is that capital mobility is an important factor for the likelihood of a positive AES-K relation.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c017_011.

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Length: 38 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:deg:conpap:c017_011

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Keywords: Aggregate elasticity of substitution (AES); Normalized CES production function; Global and local AES-capital relations.;

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  1. Kongsamut, Piyabha & Rebelo, Sérgio & Xie, Danyang, 1997. "Beyond Balanced Growth," CEPR Discussion Papers 1693, C.E.P.R. Discussion Papers.
  2. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
  3. Chris Papageorgiou & Marianne Saam, . "Two-Level CES Production Technology in the Solow and Diamond Growth Models," Departmental Working Papers 2005-07, Department of Economics, Louisiana State University.
  4. Chris Papageorgiou & Fidel Pérez Sebastián & John Duffy, 2002. "Capital-Skill Complementarity? Evidence From A Panel Of Countries," Working Papers. Serie AD 2002-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Revankar, Nagesh S, 1971. "A Class of Variable Elasticity of Substitution Production Functions," Econometrica, Econometric Society, vol. 39(1), pages 61-71, January.
  6. 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.
  7. Theodore Palivos & Giannis Karagiannis, 2007. "The elasticity of substitution as an engine of growth," Discussion Paper Series 2007_03, Department of Economics, University of Macedonia, revised Dec 2007.
  8. Lindquist, Matthew J., 2005. "Capital-Skill Complementarity and Inequality in Sweden," Working Paper Series 2/2005, Swedish Institute for Social Research.
  9. Daniel J. Henderson, 2009. "A Non-parametric Examination of Capital-Skill Complementarity," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(4), pages 519-538, 08.
  10. Kaz Miyagiwa & Chris Papageorgiou, 2007. "Endogenous Aggregate Elasticity of Substitution," Emory Economics 0707, Department of Economics, Emory University (Atlanta).
  11. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis.
  12. de La Grandville, Olivier, 1989. "Erratum [In Quest of the Slutsky Diamond]," American Economic Review, American Economic Association, vol. 79(5), pages 1307, December.
  13. Lindquist, Matthew J., 2002. "Capital-Skill Complementarity and Inequality Over the Business Cycle," Research Papers in Economics 2002:14, Stockholm University, Department of Economics, revised 01 Sep 2003.
  14. Xue, Jianpo & Yip, Chong K., 2012. "Factor Substitution And Economic Growth: A Unified Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 16(04), pages 625-656, September.
  15. de La Grandville, Olivier, 1989. "In Quest of the Slutsky Diamond," American Economic Review, American Economic Association, vol. 79(3), pages 468-81, June.
  16. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  17. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2011. "The normalized CES production function: theory and empirics," Working Paper Series 1294, European Central Bank.
  18. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2008. "Unwrapping some euro area growth puzzles: Factor substitution, productivity and unemployment," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 645-666, June.
  19. Claudia Goldin & Lawrence F. Katz, 1998. "The Origins Of Technology-Skill Complementarity," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 693-732, August.
  20. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
  21. 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, vol. 90(1), pages 282-291, March.
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