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Elasticities, markups and technical progress: evidence from a state-space approach

  • Colin Ellis
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    Conventional techniques for estimating the elasticity of substitution between capital and labour in the production process typically focus on factor-demand equations. An implicit assumption in this approach is normally that the markup is stationary. But that may not be true. This paper considers a new approach that models the markup as an unobserved variable. Using the factor-demand equations for capital and labour, technical progress can also be estimated as a stochastic process, rather than just imposing a time trend. The resulting estimates of the whole-economy markup for the UK economy suggest that it has fallen over the past 30 years, and this result appears to withstand a variety of robustness checks. The estimated elasticity is somewhat lower than most previous estimates. This implies that conventional techniques may be misleading.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2006/WP300.pdf
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    Paper provided by Bank of England in its series Bank of England working papers with number 300.

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    Date of creation: Jul 2006
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    Handle: RePEc:boe:boeewp:300
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    1. Barrell, Ray & Pain, Nigel, 1997. "Foreign Direct Investment, Technological Change, and Economic Growth within Europe," Economic Journal, Royal Economic Society, vol. 107(445), pages 1770-86, November.
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    16. Colin Ellis & Simon Price, 2003. "The impact of price competitiveness on UK producer price behaviour," Bank of England working papers 178, Bank of England.
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