IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The normalized CES production function: theory and empirics

  • Klump, Rainer
  • McAdam, Peter
  • Willman, Alpo

The elasticity of substitution between capital and labor and, in turn, the direction of technical change are critical parameters in many fields of economics. Until recently, though, the application of production functions with non-unitary substitution elasticities (i.e., non Cobb Douglas) was hampered by empirical and theoretical uncertainties. As has recently been revealed, “normalization” of production functions and production-technology systems holds out the promise of resolving many of those uncertainties. We survey and critically assess the intrinsic links between production (as conceptualized in a macroeconomic production function), factor substitution (as made most explicit in Constant Elasticity of Substitution functions) and normalization (defined by the fixing of baseline values for relevant variables). First, we recall how the normalized CES function came into existence and what normalization implies for its formal properties. Then we deal with the key role of normalization in recent advances in the theory of business cycles and of economic growth. Next, we discuss the benefits normalization brings for empirical estimation and empirical growth research. Finally, we identify promising areas of future research on normalization and factor substitution. JEL Classification: C22, E23, E25, 030, 051

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1294.pdf
Download Restriction: no

Paper provided by European Central Bank in its series Working Paper Series with number 1294.

as
in new window

Length:
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:ecb:ecbwps:20111294
Contact details of provider: Postal: 60640 Frankfurt am Main, Germany
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Cristiano Cantore & Miguel A. Leon-Ledesma & Peter McAdam & Alpo Willman, 2013. "Shocking Stuff: Technology, Hours, and Factor Substitution," School of Economics Discussion Papers 0913, School of Economics, University of Surrey.
  2. Daron Acemoglu, 2000. "Labor- and Capital- Augmenting Technical Change," NBER Working Papers 7544, National Bureau of Economic Research, Inc.
  3. Andreas Irmen & Rainer Klump, 2007. "Factor Substitution, Income Distribution, and Growth in a Generalized Neoclassical Model," CESifo Working Paper Series 2148, CESifo Group Munich.
  4. Andreas Irmen, 2010. "Steady-State Growth and the Elasticity of Substitution," CREA Discussion Paper Series 10-21, Center for Research in Economic Analysis, University of Luxembourg.
  5. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, May.
  6. Daron Acemoglu, 2002. "Directed Technical Change," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 781-809.
  7. Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 413-25, July.
  8. Chris Papageorgiou & Marianne Saam, . "Two-Level CES Production Technology in the Solow and Diamond Growth Models," Departmental Working Papers 2005-07, Department of Economics, Louisiana State University.
  9. Klump, Rainer & Saam, Marianne, 2006. "Calibration of normalised CES production functions in dynamic models," ZEW Discussion Papers 06-78, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  10. Mallick, Debdulal, 2010. "Capital-labor substitution and balanced growth," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1131-1142, December.
  11. PETER McADAM & ALPO WILLMAN, 2013. "Technology, Utilization, and Inflation: What Drives the New Keynesian Phillips Curve?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1547-1579, December.
  12. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2008. "Trends in U.S. Wage Inequality: Revising the Revisionists," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 300-323, May.
  13. León-Ledesma, Miguel A. & McAdam, Peter & Willman, Alpo, 2009. "Identifying the elasticity of substitution with biased technical change," Working Paper Series 1001, European Central Bank.
  14. Katz, Lawrence F & Murphy, Kevin M, 1992. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 35-78, February.
  15. Leo Kaas & Leopold von Thadden, 2001. "Unemployment, Factor Substitution, and Capital Formation," Vienna Economics Papers 0102, University of Vienna, Department of Economics.
  16. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
  17. Rainer Klump, 2001. "Trade, money and employment in intertemporal optimizing models of growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(4), pages 411-428.
  18. Wong, Tsz-Nga & Yip, Chong K., 2010. "Indeterminacy and the elasticity of substitution in one-sector models," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 623-635, April.
  19. Winford H. Masanjala & Chris Papageorgiou, 2004. "The Solow model with CES technology: nonlinearities and parameter heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(2), pages 171-201.
  20. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series 2234, CESifo Group Munich.
  21. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
  22. Yuhn, Ky-hyang, 1991. "Economic Growth, Technical Change Biases, and the Elasticity of Substitution: A Test of the De La Grandville Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 340-46, May.
  23. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis.
  24. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, May.
  25. Xue, Jianpo & Yip, Chong K., 2012. "Factor Substitution And Economic Growth: A Unified Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 16(04), pages 625-656, September.
  26. Robert Chirinko, 2002. "Corporate Taxation, Capital Formation, and the Substitution Elasticity between Labor and Capital," Emory Economics 0201, Department of Economics, Emory University (Atlanta).
  27. Costas Azariadis, 1996. "The Economics of Poverty Traps Part One: Complete Markets," Working Papers 9606, Centro de Investigacion Economica, ITAM.
  28. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  29. Robert W. Dimand & Barbara J. Spencer, 2008. "Trevor Swan And The Neoclassical Growth Model," NBER Working Papers 13950, National Bureau of Economic Research, Inc.
  30. Saam, Marianne, 2008. "Openness to trade as a determinant of the macroeconomic elasticity of substitution," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 691-702, June.
  31. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2008. "Unwrapping some euro area growth puzzles: Factor substitution, productivity and unemployment," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 645-666, June.
  32. Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March.
  33. Ventura, Jaume, 1997. "Growth and Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 57-84, February.
  34. Miguel A. Leon-Ledesma & Mathan Satchi, 2010. "A Note on Balanced Growth with a less than unitary Elasticity of Substitution," Studies in Economics 1007, School of Economics, University of Kent.
  35. León-Ledesma, Miguel A. & McAdam, Peter & Willman, Alpo, 2011. "Aggregation, the skill premium, and the two-level production function," Working Paper Series 1400, European Central Bank.
  36. Growiec, Jakub, 2013. "A microfoundation for normalized CES production functions with factor-augmenting technical change," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2336-2350.
  37. Norbert Berthold & Rainer Fehn & Eric Thode, 2002. "Falling Labor Share and Rising Unemployment: Long-Run Consequences of Institutional Shocks?," German Economic Review, Verein für Socialpolitik, vol. 3(4), pages 431-459, November.
  38. Charles I. Jones, 2005. "The Shape of Production Functions and the Direction of Technical Change," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 517-549, May.
  39. 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.
  40. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
  41. Nakamura, Hideki & Nakamura, Masakatsu, 2008. "Constant-Elasticity-Of-Substitution Production Function," Macroeconomic Dynamics, Cambridge University Press, vol. 12(05), pages 694-701, November.
  42. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
  43. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(1), pages 41-56, March.
  44. Hicks, John, 1970. "Elasticity of Substitution Again: Substitutes and Complements," Oxford Economic Papers, Oxford University Press, vol. 22(3), pages 289-96, November.
  45. Berndt, Ernst R, 1976. "Reconciling Alternative Estimates of the Elasticity of Substitution," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 59-68, February.
  46. Growiec, Jakub, 2008. "Production functions and distributions of unit factor productivities: Uncovering the link," Economics Letters, Elsevier, vol. 101(1), pages 87-90, October.
  47. Griliches, Zvi, 1969. "Capital-Skill Complementarity," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November.
  48. McAdam, Peter & Willman, Alpo, 2013. "Medium Run Redux," Macroeconomic Dynamics, Cambridge University Press, vol. 17(04), pages 695-727, June.
  49. Thursby, Jerry, 1980. "Alternative CES Estimation Techniques," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 295-99, May.
  50. Ramanathan, R, 1975. "The Elasticity of Substitution and the Speed of Convergence in Growth Models," Economic Journal, Royal Economic Society, vol. 85(339), pages 612-13, September.
  51. León-Ledesma, Miguel A. & McAdam, Peter & Willman, Alpo, 2010. "In dubio pro CES - Supply estimation with mis-specified technical change," Working Paper Series 1175, European Central Bank.
  52. Kennedy, Charles & Thirlwall, A P, 1973. "Technological Change and the Distribution of Income: A Belated Comment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 780-84, October.
  53. Oliver J. Blanchard, 1997. "The Medium Run," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 89-158.
  54. Guo, Jang-Ting & Lansing, Kevin J., 2009. "Capital-labor substitution and equilibrium indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 1991-2000, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20111294. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.