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Countercyclical Elasticity of Substitution

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  • Dongya Koh
  • Raül Santaeulàlia-Llopis

Abstract

We empirically show that the short-run elasticity of substitution between capital and labor (?t) is countercyclical. In recessions, capital and labor are more substitutable than in expansions. We explore the effects of the countercyclicality of ?t on aggregate fluctuations in the context of an otherwise standard competitive-markets business cycle model. The countercyclical ?t contributes to resolve four main labor-market puzzles: Dunlop-Tarshis phenomenon, labor-productivity puzzle, hours-productivity puzzle, and labor share puzzle.

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  • Dongya Koh & Raül Santaeulàlia-Llopis, 2017. "Countercyclical Elasticity of Substitution," Working Papers 946, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:946
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    Keywords

    aggregate fluctuations; elasticity of substitution; asymmetric response; labor market puzzles;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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