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Elasticity of substitution and technical progress: Is there a misspecification problem?

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  • Saltari, Enrico
  • Federici, Daniela

Abstract

In Saltari et al. (2012, 2013) we estimated a dynamic model of the Italian economy. The main result of those papers is that the weakness of the Italian economy in the last two decades is due to the total factor productivity slowdown. In those models the information and communication technology (ICT) capital stock plays a key role in boosting the efficiency of the traditional capital, and hence of the whole economy. The ICT contribution is captured in a multiplicative way through a weighting factor. The other key parameter at center of our model to explain the Italian productivity decline is the elasticity of substitution. Recent literature provides estimates well below 1 -- thus rejecting the traditional Cobb-Douglas production function -- though there is no particular value on which the consensus converges. In our opinion, however, these estimates are affected by a specification problem, which has theoretical roots. The technological parameters are long run in nature but the estimates are based on short-run data: the "real" issue is to bridge this gap. Our aim is to look more deeply into the estimation procedure of the technological parameters. The standard estimation results present a common fundamental problem of serially correlated residuals so that the standard errors will be under-estimated (i.e. biased downwards). We think that at the root of this problem there are two theoretical issues: the estimated models are static in nature and do not incorporate frictions and rigidities. Our modelling strategy takes into account, though implicitly, adjustment costs without leaving out the optimization hypothesis. Although we cannot in general say that these properties get rid of the serial correlation problem, the correlation statistics for our model does show that residuals are not serially correlated.

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  • Saltari, Enrico & Federici, Daniela, 2013. "Elasticity of substitution and technical progress: Is there a misspecification problem?," MPRA Paper 52194, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:52194
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    Cited by:

    1. Alessandro Mistretta & Francesco Zollino, 2021. "Recent Trends in Economic Activity and TFP in Italy with a Focus on Embodied Technical Progress," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 7(1), pages 79-107, March.
    2. Bellocchi, Alessandro & Travaglini, Giuseppe, 2023. "Can variable elasticity of substitution explain changes in labor shares?," Journal of Macroeconomics, Elsevier, vol. 76(C).
    3. Saltari, Enrico & Federici, Daniela, 2014. "Elasticity of substitution and the slowdown of the Italian productivity," MPRA Paper 58422, University Library of Munich, Germany.
    4. Alessandro Mistretta & Francesco Zollino, 0. "Recent Trends in Economic Activity and TFP in Italy with a Focus on Embodied Technical Progress," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 0, pages 1-29.
    5. Saam, Marianne, 2014. "The identification of directed technical change revisited," ZEW Discussion Papers 14-127, ZEW - Leibniz Centre for European Economic Research.
    6. Sergio De Nardis & Francesca Parente, 2022. "Technology and task changes in the major EU countries," Contemporary Economic Policy, Western Economic Association International, vol. 40(2), pages 391-413, April.

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    More about this item

    Keywords

    Keywords: CES production function; Elasticity of substitution; Income distribution; Factor-augmenting technical progress and ICT technical change.;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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