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That elusive elasticity and the ubiquitous bias: is panel data a panacea?

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  • James Smith

Abstract

There is often assumed to be a unit elasticity of substitution between capital and labour. But estimates based on neoclassical capital demand equations frequently find a smaller value. Recent time-series work for the United States and Canada has suggested that, once the biases inherent in estimating cointegrating vectors are properly accounted for, the elasticity could indeed be close to 1. This paper investigates this possibility for the United Kingdom. First the analysis considers aggregate data where the estimated elasticity is close to 0.4. Then a unique industry-level data set for the United Kingdom is exploited in order to further pinpoint the estimated elasticity. Estimates using dynamic panel data methods are close to those from aggregate data, providing a robust statistical rejection of a unit elasticity in UK data.

Suggested Citation

  • James Smith, 2008. "That elusive elasticity and the ubiquitous bias: is panel data a panacea?," Bank of England working papers 342, Bank of England.
  • Handle: RePEc:boe:boeewp:342
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2008/WP342.pdf
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    Cited by:

    1. Jane Gravelle, 2010. "Economic Effects of Investment Subsidies," Chapters,in: Tax Reform in Open Economies, chapter 3 Edward Elgar Publishing.
    2. Coulibaly Brahima & Millar Jonathan N., 2011. "The "Elusive" Capital-User Cost Elasticity Revisited," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-41, September.
    3. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
    4. repec:wsi:afexxx:v:12:y:2017:i:02:n:s2010495217500087 is not listed on IDEAS
    5. Junge, Georg & Kugler, Peter, 2017. "Optimal equity capital requirements for Swiss G-SIBs," Working papers 2017/11, Faculty of Business and Economics - University of Basel.
    6. Nadja Dwenger, 2014. "User Cost Elasticity of Capital Revisited," Economica, London School of Economics and Political Science, vol. 81(321), pages 161-186, January.
    7. Fatica, Serena, 2017. "Business capital accumulation and the user cost: is there a heterogeneity bias?," Working Papers 2017-11, Joint Research Centre, European Commission (Ispra site).

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