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Medium run redux: technical change, factor shares and frictions in the euro area

  • McAdam, Peter
  • Willman, Alpo

We develop a framework for analyzing “medium-run” departures from balanced growth, and apply it to the economies of continental Europe. A time-varying factor-augmenting production function (mimicking “directed” technical change) with a below-unitary substitution elasticity coupled with supporting short-run factor demands (and price setting) is shown to account for the observed dynamics of factor incomes shares, capital deepening and the capital-output ratio. Based on careful data accounting, we also identify a rising mark-up, which we ascribe to the rise of Services. The balanced growth path emerges as a special (and testable) case of our framework, as do existing strands of medium-run debates. JEL Classification: C22, E23, E25, O30, O51

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Paper provided by European Central Bank in its series Working Paper Series with number 0915.

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Date of creation: Jun 2008
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Handle: RePEc:ecb:ecbwps:20080915
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