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Euro area production function and potential output: a supply side system approach

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  • Willman, Alpo

Abstract

In this paper, we present a three equation supply-side model based on aggregation across sectors with sector specific mark-ups and the technology parameters of the production function. The model has been applied to euro area data from the 1970s assuming that the underlying production function is either CES or Cobb-Douglas. Estimation results support the Cobb-Douglas case and the estimated supply-side model accounts satisfactorily for the stylised features of the data, i.e. the hump shape in the labour income share coupled with the relatively stable capital-to-labour income ratio and a noticeable change in profit margins and sectoral production shares. We also produce estimates of potential output and the output gap conditional on estimated production functions and examine the sensitivity of output gap estimates with respect to the alternative parameterisation of the production function. JEL Classification: E23, E25

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Paper provided by European Central Bank in its series Working Paper Series with number 0153.

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Date of creation: Jun 2002
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Handle: RePEc:ecb:ecbwps:20020153

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  1. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," Harvard Institute of Economic Research Working Papers 1719, Harvard - Institute of Economic Research.
  2. Coenen, Günter & Wieland, Volker, 2002. "A Small Estimated Euro Area Model with Rational Expectations and Nominal Rigidities," CEPR Discussion Papers 3574, C.E.P.R. Discussion Papers.
  3. Issing, Otmar, 1997. "Monetary targeting in Germany: The stability of monetary policy and of the monetary system," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 67-79, June.
  4. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  5. Allen, Chris & Urga, Giovanni, 1999. "Interrelated Factor Demands from Dynamic Cost Functions: An Application to the Non-energy Business Sector of the UK Economy," Economica, London School of Economics and Political Science, vol. 66(263), pages 403-13, August.
  6. 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.
  7. Fabiani, Silvia & Mestre, Ricardo, 2000. "Alternative measures of the NAIRU in the euro area: estimates and assessment," Working Paper Series 0017, European Central Bank.
  8. McAdam, Peter & Willman, Alpo, 2004. "Production, supply and factor shares: an application to estimating German long-run supply," Economic Modelling, Elsevier, vol. 21(2), pages 191-215, March.
  9. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  10. Hall, Stephen & Nixon, James, 2000. "Unemployment and the capital stock: a dynamic structural model of the UK supply side," Economic Modelling, Elsevier, vol. 17(3), pages 415-437, August.
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Cited by:
  1. Natan P. Epstein & Corrado Macchiarelli, 2010. "Estimating Poland's Potential Output," IMF Working Papers 10/15, International Monetary Fund.
  2. Tommaso Proietti & Alberto Musso & Thomas Westermann, 2007. "Estimating potential output and the output gap for the euro area: a model-based production function approach," Empirical Economics, Springer, vol. 33(1), pages 85-113, July.
  3. McAdam, Peter & Willman, Alpo, 2003. "New Keynesian Phillips Curves: a reassessment using euro-area data," Working Paper Series 0265, European Central Bank.
  4. repec:cml:incocp:1-03 is not listed on IDEAS
  5. McAdam, Peter & Willman, Alpo, 2004. "Production, supply and factor shares: an application to estimating German long-run supply," Economic Modelling, Elsevier, vol. 21(2), pages 191-215, March.
  6. Tommaso Proietti & Alberto Musso, 2012. "Growth accounting for the euro area," Empirical Economics, Springer, vol. 43(1), pages 219-244, August.
  7. Klump, Rainer, 2003. "Inflation, factor substitution and growth," Working Paper Series 0280, European Central Bank.
  8. Juha Kilponen & Matti Viren, 2010. "Why do growth rates differ? Evidence from cross-country data on private sector production," Empirica, Springer, vol. 37(3), pages 311-328, July.
  9. Jaromir Benes & Tibor Hledik & Jaromir Hurnik & Jiri Podpiera & Jan Vlcek, 2005. "CNB Economic Research Bulletin: Potential Output," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 1, volume 3, number rb03/1 edited by Vladislav Flek, August.
  10. José Ronaldo de Castro Souza Júnior, 2005. "Produto Potencial: Conceitos, Métodos de Estimação e Aplicação à Economia Brasileira," Discussion Papers 1130, Instituto de Pesquisa Econômica Aplicada - IPEA.
  11. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2004. "Factor substitution and factor augmenting technical progress in the US: a normalized supply-side system approach," Working Paper Series 0367, European Central Bank.
  12. Miguel A. Le�n-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-57, September.
  13. León-Ledesma, Miguel A. & McAdam, Peter & Willman, Alpo, 2010. "In dubio pro CES - Supply estimation with mis-specified technical change," Working Paper Series 1175, European Central Bank.
  14. Heipertz, Martin, 2003. "The Stability and Growth Pact - Not the best but better than nothing. Reviewing the debate on fiscal policy in Europe's Monetary Union," MPIfG Working Paper 03/10, Max Planck Institute for the Study of Societies.
  15. Jürgen Janger & Johann Scharler & Alfred Stiglbauer, 2006. "The Potential Growth Prospects of the Austrian Economy — Methods and Determinants," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 24–52.
  16. Jiri Podpiera, 2004. "Consumers, Consumer Prices and the Czech Business Cycle Identification," Working Papers 2004/04, Czech National Bank, Research Department.
  17. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2007. "Das Erreichte nicht verspielen. Jahresgutachten 2007/08," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 200708.
  18. Phurichai Rungcharoenkitkul, 2012. "Modeling with Limited Data," IMF Working Papers 12/96, International Monetary Fund.

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