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

  • James Smith
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    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.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2008/WP342.pdf
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    Paper provided by Bank of England in its series Bank of England working papers with number 342.

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    Date of creation: Feb 2008
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    Handle: RePEc:boe:boeewp:342
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    8. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    9. Jerry Coakley, Ana-Maria Fuertes, Ron Smith, 2001. "Small sample properties of panel time-series estimators with I(1) errors," Computing in Economics and Finance 2001 191, Society for Computational Economics.
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    11. Coakley, Jerry & Flood, Robert P. & Fuertes, Ana M. & Taylor, Mark P., 2005. "Purchasing power parity and the theory of general relativity: the first tests," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 293-316, March.
    12. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
    13. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February.
    14. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    15. Mark Doms & Timothy Dunne, 1994. "Capital Adjustment Patterns in Manufacturing Plants," Working Papers 94-11, Center for Economic Studies, U.S. Census Bureau.
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