Aggregate Elasticity of Substitution and Economic Growth: A Synthesis
AbstractThis 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 InfoPaper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c017_011.
Length: 38 pages
Date of creation: Sep 2012
Date of revision:
Aggregate elasticity of substitution (AES); Normalized CES production function; Global and local AES-capital relations.;
Other versions of this item:
- Xue, Jianpo & Yip, Chong K., 2013. "Aggregate elasticity of substitution and economic growth: A synthesis," Journal of Macroeconomics, Elsevier, vol. 38(PA), pages 60-75.
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
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