Cobb-Douglas production function revisited, VAR and VECM analysis and a note on Fischer/Cobb-Douglass paradox
AbstractCobb-Douglas production function is a basic function in growth models. The modeling in this paper showed that VAR is stable; KPSS test showed that output, capital and labor are not trend stationary. Johansen’s co-integration test showed that a requirement for Fischer/Cobb-Douglass paradox to work is met at 3 lags, there factor shares are I(0). The Fisher/Cobb-Douglas Paradox is based on constant factor shares. (In terms of time-series analysis, such constancy is equivalent to factor shares being I(0). The Fisher/Cobb-Douglas Paradox is thus why the estimated σ equals unity independent of the underlying production technologies generating the simulated data.At 4 lags however these variables are I(1) variables i.e. Cobb-Douglass is not CES function anymore. ADF test for factors of production showed that natural logarithm of capital is stationary variable, while log of labor is not-stationary except at 10% level of significance. Adjustment parameters showed that labour responds more / faster than loutput (log of GDP) and lcapital on if there is change / shock in the system.VECM model failed the stability eingevalues test.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 33576.
Date of creation: 20 Sep 2011
Date of revision:
Fisher/Cobb-Douglas Paradox; cointegration; VAR; VECM; ADF test ; unit root;
Find related papers by JEL classification:
- B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-01 (All new papers)
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- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
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