explaining business cycles in small open economies abstract this paper analyzes the role of world price shocks fluctuations in the prices of capital intermediate and primary goods and in the world real interest rate in the generation and propagation of business cycles in small open developing countries i construct a stochastic dynamic multi sector small open economy model the model is a variant of the specific factors model and reflects the major structural characteristics of developing economies i utilize variance decomposition methods to quantitatively evaluate the impact of world price shocks the results indicate that world price shocks account for a significant fraction of business cycle variability in developing countries

returns to scale damages to scale marginal rate of transformation and rate of substitution in dea environmental assessment abstract this study discusses a new use of dea data envelopment analysis environmental assessment to measure mrt marginal rate of transformation and rs rate of substitution between desirable and undesirable outputs to discuss mrt and rs this study first examines a concept of disposability from the perspective of corporate strategies to adapt a regulation change on undesirable outputs the concept of disposability is separated into natural and managerial disposability then this study explores the computational framework of rts returns to scale and dts damages to scale the type of rts is measured within the natural disposability while the type of dts is measured within the managerial disposability considering the two types of disposability this study discusses mrt and rs between desirable and undesirable outputs as an illustrative example this study applies the proposed approach to evaluate the performance of us coal fired power plants this study finds that the regulation policy on no x and so 2 has been effective on their emission controls under us clean air act caa the regulation on co 2 or a major source of the global warming and climate change is still insufficient in the united states therefore this study recommends that us federal and local governments should regulate the amount of co 2 emission under the caa

energy substitution effect on transport sector of pakistan a trans log production function approach abstract transport sector of pakistan is one of the highest fossil fuel consumption and carbon dioxide co2 emission sector as a key user of fossil fuel energy pakistan s transport sector has created many problems i e noise air pollution co2 emissions and environmental problem in this study trans log production function model for pakistan s transport sector is established and input factors of labor capital and energy consumption are comprised the output elasticity of an individual input elasticity between a pair of factors and elasticity of substitution between input factors are analyzed to manage the multicollinearity issue ridge regression is applied at different values of k from 1991 to 2018 the outcomes show that output elasticities and a pair of input factor s elasticities are increasing the elasticities of substitutions between labor energy consumption and capital energy consumption show higher outcomes because of the more elevated amount of substitution elasticities the substitution elasticity between labor and capital starts from 0 9797 to 0 9326 with slightly decreasing trend the outcomes suggest that maximum output can be achieved by increasing capital and energy technologies by allocating the maximum capital in the transport industry energy saving technologies substitution between energy and capital and substitution among capital labor can enhance environmental protection in the above s view function the present study estimates the level of energy saving and co2 emissions reduction under the different scenarios from 2015 to 2018 the policy suggestions of the results are given below

marginal rate of transformation and rate of substitution measured by dea environmental assessment comparison among european and north american nations this study discusses the new use of dea data envelopment analysis environmental assessment to measure mrt marginal rate of transformation and rs rate of substitution among production factors e g inputs desirable and undesirable outputs to measure the degree on mrt and rs this study first examines a concept of disposability from the perspective of economic strategies to combat various environmental issues the strategies are extendable to a policy change for pollution prevention the underlying concept is separated into natural and managerial disposability under managerial disposability it is possible for us to measure an occurrence of desirable congestion or eco technology innovation considering the disposability concept this study discusses how to measure the type and magnitude of mrt and rs a problem of the mrt rs measurement is that these measures usually become unstable e g very large or small in these magnitudes because dea does not assume any functional form for economic activities to overcome such a difficulty this study equips dea environmental assessment with multiplier restriction by utilizing a unique feature on a proposed data treatment the multiplier restriction in dea has been never explored in previous works on environmental assessment in an application this study finds three important economic concerns on europe and north america first western europe outperforms eastern europe and north america in their unified efficiency measures under managerial disposability this study statistically confirms a difference between western and eastern europe but not between western europe and north america this result exhibits that eastern europe is not yet well developed at the level of the other two regions second eastern europe has exhibited mrt estimates that are different from western europe and north america the nations in eastern europe have an economic potential for industrial developments because the level of their industrial pollutions is less than that of the other two regions the potential is also found in their mrt estimates finally an interesting difference can be found in the rs estimate between eastern europe and western europe from 2008 to 2012 they have statistically exhibited a difference between the two regimes but not with north america this is because most nations in both western europe and north america have already attained a high level of economic successes so that they have a limited industrial potential under current production technology and eco technology the situation of the two regions will be changed along with new technology development in contrast eastern europe is different from the other two regions in terms of attaining such a level of social sustainability because of limited capital accumulation and limited opportunity for technology innovation

skilled labor unskilled labor and economic growth abstract we study a growth model in which workers with different skill levels are imperfect substitutes we show that economies with high substitutability between skilled and unskilled workers have high levels of capital output and a high proportion of skilled workers

renegotiation collective action clauses and sovereign debt markets abstract collective action clauses cacs are provisions specifying that a supermajority of bondholders can change the terms of a bond we study how cacs determine governments fiscal incentives sovereign bond prices and default probabilities in environments with and without contingent debt and imf presence we claim that cacs are likely to be an irrelevant dimension of debt contracts in current sovereign debt markets because of the variety of instruments utilized by sovereigns and the implicit imf guarantee nonetheless under a new international bankruptcy regime like that recently proposed by the imf cacs can increase significantly the cost of borrowing for sovereigns contrary to what is suggested in previous empirical literature

factor substitution average firm size and economic growth this paper extends the lucas 1978 the bell journal of economics 9 2 508 523 analysis of firm size by taking into account a normalised aggregate ces production function in a general equilibrium framework it is proved that there is an inverse relation between the elasticity of substitution and average firm size if interpreted together with the fact that richer countries are characterised by a higher elasticity of substitution this result can explain why the recent literature finds a positive association between the importance of smes in an economy and its stage of development but seems to fail in finding causality between the two both have a common origin a high value of the elasticity of substitution this paper also provides a first empirical test of the theory proposed using cross country data from both developed and developing countries

collective action clauses how do they affect sovereign bond yields abstract we study the effects of the adoption of collective action clauses cacs on government bond yields by exploiting secondary market data on sovereign bonds quoted in international markets from march 2007 to april 2011 cacs are assessed security by security using a panel data approach we find a u shaped effect of cacs on yields according to the credit rating of the issuer while the impact is negligible for the highest ratings a significant yield discount emerges for mid range ratings which is smaller for bad ratings and possibly insignificant for the worst ratings this relationship appears fairly robust across a number of checks this evidence may reflect the fact that cacs are valuable because they help with orderly restructuring unless the perceived probability of default is too small nevertheless at low ratings this effect can be weakened by an increasing risk of moral hazard

elasticity of substitution and technical efficiency evidence from the us electricity generation abstractthe implications of national or regional energy policies for technical efficiency and environmental outcomes in electricity generation depend on fossil fuel input substitution this study u

factor shares inequality and capital flows i present an endogenous growth model where innovations are factor saving and model the choice of technologies in an overlapping generations framework markets are competitive and factor prices are determined by marginal productivity of factors therefore the income share of reproducible factors increases with the stage of development beyond the standard results of this type of model i find that i without bequests long run growth is not possible ii if the economy presents long run growth then intrageneration inequality may last forever but if the economy does not present long run growth then in steady state there is no intrageneration inequality iii when the economy is open the pattern of capital flows depends not only on the relative abundance of factors but also on the technologies and for this reason capital may not flow from rich to poor economies and iv consistently capital flows may not help to break poverty traps

regional trade agreements and the pattern of trade a networks approach this paper uses a complex network approach for the analysis trade effects from regional trade agreements on world trade flows we use bilateral trade data to compute the network community structure for every year between 1970 and 2000 we compare this to null community structures that emerge from various models based on regional and geographical classifications the implementation of rta s and gravity models of trade our results show that rta formation appears to have a cyclical pattern on the world trade network community structure we document periods where bilateral trade flows and the structure of the world trade network are consistent with those predicted by formation of rtas these cycles occur in 1980 86 and 1990 96 at the same time we document periods in which the pattern in the world trade network is not explained by rta formation two periods 1986 90 and 1997 2000 show a pattern of bilateral trade flows that moves away from the prediction that results from assuming rta formation as the driving force in the determination of the world trade network structure factors contributing to the latter parts of the cycle during our sample period include formation of regional trade networks in east asia that account for a significant portion of world trade but are not formalised by rtas in force

sovereign debt restructuring since the early 1980 s patterns of emergingmarket finance have changed significantly greater integration of capital markets and a trend toward a greater use of direct lending through bonds has led to relatively decreased use of indirect finance through syndicated bank loans these changes have produced benefits to investors through opportunities for risk diversification and to emerging market sovereign borrowers by increasing the investor base the broadened investor base in bond financing however raises problems of coordination and collective action in the event of a sovereign borrower s default and restructuring now three parties are involved in determining the debt markdown required to produce solvency the debtor creditors and the global taxpayer through international financial institutions ifi s the complex relationships among the borrowers creditors and the global taxpayer have made restructuring obligations a costly and time consuming exercise especially with the possibility of holdouts both the sovereign borrower and its creditors have an incentive to avoid a restructuring in the hope of financial assistance from the global taxpayer sovereign governments may not undertake the politically painful steps involved in beginning a restructuring when there is always the hope that official assistance will be forthcoming creditors may not accept a reduction in the value of their claims also in the hope that official assistance will be forthcoming costs of postponed and disorderly restructurings are real and substantial delays in restructuring can drain a country s resources and increase the ultimate costs of restoring financial sustainability creditors bear a burden as well because the losses associated with the restructuring are reflected in values of

ces production functions and economic growth we examine inconsistencies and controversies related to the use of ces production functions in growth models first we show that not all variants of ces functions commonly used are consistently specified second using a simple growth model we find that a higher elasticity of substitution leads to a higher steady state and makes the emergence of permanent growth more probable it is also pointed out that the effect of a higher elasticity of substitution on the speed of convergence depends on the relative scarcity of the factors of production finally we discuss possible explanations of variations in the elasticity of substitution jel classification o41 o11

foreign direct investment and export upgrading this study presents evidence suggesting that attracting foreign direct investment fdi offers potential for raising the quality of exports in developing countries our analysis relates unit values of exports at the four digit sitc level to data on sectors treated by investment promotion agencies as a priority in their efforts to attract fdi the sample covers 105 countries from 1984 to 2000 the findings are consistent with a positive effect of fdi on unit values of exports in developing countries the evidence for high income economies is ambiguous there is no indication that fdi increases the similarity of export structure of developing and developed economies

a dual elasticity of substitution production function with an application to cross country inequality abstract this note first develops a production function with two elasticities of substitution between two input factors second the note gives an application regarding the unequal development of relative capital intensities and productivities across countries and tries to quantify it empirically

in quest of the slutsky diamond the slutsky equation can be constructed as a parallelogram a diamond the area of which is proportional to the elasticity of substitution this construction permits to show immediately that demand functions become concave on an interval if the elasticity of substitution increases sufficiently also the diamond sheds light on the fact that the production level increases with the elasticity of substitution as an application the author shows that the elasticity of substitution has a direct bearing not only on the rate of growth of an economy but also on the very existence of sustained growth copyright 1989 by american economic association

new measures of factor productivity in australia a sato approach this article derives new results of the elasticity of substitution es between capital and labour and factor productivity for australia an economy which experienced major economic reform that substantially increased the flexibility of its labour product and capital markets throughout the 1980s and 1990s it employs a sato production function specification which has unique properties that enable the estimation of capital labour substitution elasticity and changing marginal productivities through time these estimates reveal that the substitution elasticity and labour productivity in australia rose significantly from the mid 1960s and remained elevated during the economic reform period a novel contribution of this article is the depiction of australia s production isoquants to convey how combining labour and capital to produce real gross domestic product gdp has changed over recent decades

the long term success of the neoclassical growth model in this paper we seek to re establish the link between the constant elasticity of substitution ces production function and neoclassical solow growth theory we do so in three dimensions first we review the increasing importance of the ces technology in modern dynamic macroeconomics in expanding not only theory but also in addressing important policy questions second we aue that the importance of the ces function in growth theory is intimately linked to normalization finally we examine the data congruence between ces functions and recent growth patterns in the usa and the euro area economies where we apply a supply side system incorporating a ces function with factor augmenting and time varying technical progress

capital labor substitution and equilibrium indeterminacy empirical evidence indicates that the elasticity of capital labor substitution for the aggregate u s economy is below unity in contrast the existing indeterminacy literature has mostly restricted attention to a cobb douglas production function which imposes a substitution elasticity exactly equal to unity this paper examines the quantitative relationship between capital labor substitution and the conditions needed for equilibrium indeterminacy and belief driven fluctuations in a one sector growth model with variable capital utilization the substitution elasticity has little quantitative impact on the minimum degree of increasing returns needed for indeterminacy however when capital utilization is constant a below unity substitution elasticity sharply raises the minimum degree of increasing returns in this version of the model lower substitution elasticities impose a higher adjustment cost on labor hours that cannot be mitigated by shifts in the capital utilization rate overall our results show that empirically plausible departures from the cobb douglas specification can make indeterminacy more difficult to achieve

the 1956 contribution to economic growth theory by robert solow a major landmark and some of its undiscovered riches the famous 1956 contribution by robert solow was always thought to be central to positive or descriptive economic growth theory we show that it is also at the core of optimal growth because the fisher equation of competitive equilibrium is nothing short of an euler equation it corresponds to the maximization of the sum of discounted consumption flows from this equation an optimal savings rate results with reasonable very reachable values we also show the importance of the elasticity of substitution there is a threshold value of this parameter leading to a permanent growth rate of income per person that is above the labour augmenting rate of technical progress and that rate does depend upon the investment saving ratio

shocking stuff technology hours and factor substitution the response of hours to technology shocks is a key controversy in macroeconomics we show that differences between rbc and nk models hinge on highly restrictive views of technology we introduce ces production technologies and demonstrate that the response of hours depends on the factor augmenting nature of shocks and the capital labor substitution elasticity in both models we develop analytical expressions to establish the thresholds determining its sign this opens new margins for shock identification combining theory and var evidence we discuss how our models provide new robust restrictions for empirical work especially using the labor income share

the generalized theory of transfers and welfare bilateral transfers in a multilateral world paul samuelson s 1952 1954 classic papers on the transfer problem addressed two separate analytical issues the positive effect of a transfer on the terms of trade and the welfare effect of the transfer on the donor and the recipient since then a considerable body of literature has grown up on the positive analysis while samuelson 1954 himself had extended the 2 x 2 x 2 free trade analysis to allow for tariffs and transport costs subsequent writers have analyzed other extensions of the model for example to allow for nontraded goods as with leisure in samuelson 1971 or general nontraded goods in john chipman 1974 and ronald jones 1970 1975 remarkably however the welfare analysis of transfers has not paralleled these developments since wassily leontief 1936 produced an example of immiserizing transfer from abroad and samuelson 1947 argued that the example required market instability the proposition that has monopolized attention has been that a transfer in the conventional 2 x 2 x 2 model in its free trade version cannot immiserize the recipient or enrich the donor as long as world markets are stable in the walras sense interestingly samuelson 1954 who did extend the positive analysis to include tariffs did not go on to ask whether immiserization of the transfer recipient and hence symmetrically enrichment of the donor in a two country model could now arise consistent with market stability recently the welfare analysis of transfers has been extended in two different directions both apparently unconnected and both yielding the conclusion that transfers from abroad can be immiserizing and that the donor may improve its welfare despite market stability one route to this conclusion has been the introduction of a third economic agent or country that is outside of the transfer process in the appendix of his 1960 paper analyzing the interaction between trade policy and income distribution harry johnson discussed the possibility of welfareparadoxical redistribution between two factor income classes capital and labor in an open economy thereby providing what can be interpreted as a treatment of the threeagent transfer problem for the case in which donor and recipient are both completely specialized in the ownership of a single different factor an independent analysis of the three agent transfer problem using a restrictive model with given endowments of goods and fixed coefficients in consumption was also undertaken in an important paper by david gale 1974 2 brecher and bhagwati bhagwati department of economics columbia university new york ny 10027 brecher department of economics carleton university ottawa on kis 5b6 hatta department of political economy the johns hopkins university baltimore md 21218 we thank the national science foundation grant no 524718 for partial financial support of the research underlying this paper the paper was written when brecher and hatta were visiting columbia university 1981 82 gratefully acknowledged are helpful comments and suggestions from john chipman avinash dixit jacques dreze robert feenstra jacob frenkel ronald jones murray kemp andreu mas colell michael mussa john riley lars svensson and robert willig from anonymous referees and from seminar participants at berkeley harvard minnesota rochester chicago and the university of california los angeles after the present paper was submitted for publication and following its presentation at rochester our attention was drawn to this appendix which was noticed by a student of ronald jones subsequently we learned from makoto yano that motoshige itoh had pointed out an important related paper by ryuotaro komiya and t shizuki 1967 whose condition 11 for the johnson case anticipated our equation 12 below we are grateful for having both of these references brought to our attention 2 gale constructs an example in which the donor is enriched along with the recipient furthermore this immediately implies that a reverse transfer will immis

substitution between clean and dirty energy inputs a macroeconomic perspective in macroeconomic models the elasticity of substitution between clean and dirty energy inputs within the energy aggregate is a central parameter in assessing the necessary conditions for long run green growth using new sectoral data in a panel of 26 countries we formulate specifications of nested constant elasticity of substitution production functions that allow estimating this parameter for the first time we present evidence that it significantly exceeds unity a favorable condition for promoting green growth

two level ces production technology in the solow and diamond growth models the two level ces aggregate production function that nests a ces into another ces function has recently been used extensively in theoretical and empirical applications of macroeconomics this paper examines its theoretical properties and establishes existence and stability conditions of equilibria under the solow and diamond growth models in addition it examines the efiect of changes in substitution parameters on transitional growth and steady states it is shown that in the solow model the su cient condition for a steady state is fulfllled for a larger range of substitution parameter values than with the basic ces function in the diamond model an increase in substitution parameters results in higher transitional growth under weaker conditions than with the basic ces function

the normalized ces production function theory and empirics abstract 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 specifically non unitary substitution elasticities i e non cobb douglas was hampered by empirical and theoretical uncertainties as recently revealed normalization of production technology systems holds out the promise of resolving many of those uncertainties we survey and assess the intrinsic links between production as conceptualized in a 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 constant elasticity of substitution 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

interfuel substitution a meta analysis interfuel substitutability has been of longstanding interest to the energy economics and policy community however no quantitative meta analysis has yet been carried out of this literature this paper fills this gap by analyzing a broad sample of studies of interfuel substitution in the industrial sector manufacturing industry or subindustries or macro economy of a variety of developed and developing economies publication bias is controlled for by including the primary study sample size in the meta regression results for the shadow elasticities of substitution between coal oil gas and electricity for forty six primary studies show that at the level of the industrial sector there are easy substitution possibilities between all the fuel pairs with the exception of gas electricity and coal electricity substitution possibilities seem more constrained at the macro level and less constrained in sub industries estimates also vary across countries publication bias does not seem to be present but model and data specification issues very significantly affect the estimates derived by each individual study estimates from cross section regressions are generally largest fixed effects panel estimates intermediate in magnitude and time series estimates are mostly much smaller econometric research suggests that the fixed effects estimates are likely the best among the existing studies though biased downwards

does strengthening collective action clauses cacs help does improving creditor coordination by strengthening cacs lead to efficiency gains in the functioning of sovereign bond markets we address this question in a model featuring both debtor moral hazard and creditor coordination under incomplete information conditional on default we characterize the interim efficient cac threshold and show that strengthening cacs away from unanimity results in interim welfare gains however once the impact of strengthening cacs on debtor s incentives is taken into account we demonstrate the robust possibility of a conflict between ex ante and interim efficiency we calibrate our model to quantify such a welfare trade off and discuss the policy implications of our results

the link between increased trade openness and the terms of trade an empirical investigation abstract despite the fairly widespread move towards more open trade policies in developing countries relatively little attention has been paid to the effect of these policies on the terms of trade using a large sample of countries this paper tries to assess empirically the validity of the small country assumption which underlies the washington consensus on development strategies our evidence suggests that there is a sizable group of countries ldcs and non ldcs for which the assumption of exogenous traded goods prices can be rejected one implication is that terms of trade considerations should be included in the assessment of trade liberalization policies these effects might rise considerably when several countries liberalize simultaneously

economic growth and the elasticity of substitution two theorems and some suggestions at the beginning of the twentieth century the work of the swedish economist knut wicksell 1901 marked an important advance in our understanding of the relationship between the structure of production functions and income distribution wicksell had asked the following question among many others suppose that the marginal productivities are equal to the remuneration rates of each factor what then should be the form of the corresponding production function he pointed out p 125 that the general integral of the partial differential equation implied by this relationship was of the form y lf kil which meant in turn that the product y was necessarily a homogeneous of degree one function of capital k and labor l as an example he gave a function where the shares of k and l in y were constant and wrote down the function which would be rediscovered decades later by charles w cobb and paul h douglas 1928 however it is only half a century later in robert m solow s nobel prize winning 1956 essay that implications between the structure of the production function and long run equilibrium or disequilibrium of the economy were drawn in his classic article a contribution to the theory of economic growth solow had considered three cases analytically other cases were also discussed geometrically using a phase diagram he had labeled the two first cases 1hlarrod domar and cobb douglas respectively and he referred to the third type of production function as offering a bit of variety it was y ak 2 l 2 2 a particular case of y akp lp 1p in those early days solow had not pointed out to the reader that his cases could have been numbered 0 1 and 2 following the elasticity of substitution of the corresponding production function it would be only five years later in 1961 that with his coauthors kenneth j arrow et al he would find the general form of the two factor constant elasticity of substitution ces production function by integrating the differential equation corresponding to the observed relationship between output per capita and the wage rate solow s third case was indeed highly interesting since it allowed the possibility of everincreasing income per head even without any technical progress indeed solow showed that due to the efficiency of the system entailed by the particular production function he had chosen there existed a threshold for the savings rates s to generate investment per head large enough for income per head to grow forever that threshold was s nla2 where n is the growth rate of the population it was then natural to ask whether one could express that threshold in terms of the elasticity of substitution a the value of that threshold was determined by de la grandville 1989 to be equal to s no3 or where a is k s coefficient in a normalized ces function equal to a in solow s third case where u 2 for any s and n values this relationship gives also the threshold value in implicit form by the solution of ao1 1 log 3q or ilog nls by totally differentiating the last relationship one could observe that the threshold for the elasticity of substitution to entail ever sustained growth was an in klump faculty of mathematics and economics university of ulm helmholtzstrasse 20 d 89081 ulm germany de la grandville department of economics university of geneva 102 boulevard carl vogt ch 1211 geneva 4 switzerland we gratefully acknowledge the comments of seminar participants at stanford university and at the universities of stuttgart hohenheim and munich where parts of the paper were presented also we would like to thank without implicating in any way robert solow for his insightful remarks and an anonymous referee for very helnfuil supgestions wicksell cobb and douglas would no doubt burst with pride if they knew that one of our first year students wrote in a paper of his of course we recognize here a kirk douglas production function

aggregate stability and balanced budget rules it has been shown that under perfect competition and a cobb douglas production function a basic real business cycle model may exhibit indeterminacy and sunspot fluctuations when income tax rates are determined by a balanced budget rule bbr this paper introduces in an otherwise standard real business cycle model a more general and data coherent class of production functions namely a constant elasticity of substitution production function we show that the degree of substitutability between production factors is a key ingredient to understanding the de stabilizing properties of a bbr then we calibrate the model consistently with the empirical evidence that is we set the elasticity of substitution between labor and capital below unity we show that compared to the cobb douglas case the likelihood of indeterminacy under a bbr is greatly reduced in the u s the eu and the uk

the prebisch singer hypothesis four centuries of evidence we employ a unique data set and new time series techniques to reexamine the existence of trends in relative primary commodity prices the data set comprises 25 commodities and provides a new historical perspective spanning the seventeenth to the twenty first centuries new tests for the trend function robust to the order of integration of the series are applied to the data results show that eleven price series present a significant and downward trend over all or some fraction of the sample period in the very long run a secular deteriorating trend is a relevant phenomenon for a significant proportion of primary commodities 2010 the president and fellows of harvard college and the massachusetts institute of technology

steady state growth and the elasticity of substitution in a neoclassical economy with endogenous capital and labor augmenting technical change the steady state growth rate of output per worker is shown to increase in the elasticity of substitution between capital and labor this confirms the assessment of klump and de la grandville 2000 that the elasticity of substitution is a powerful engine of economic growth however unlike their findings my result applies to the steady state growth rate moreover it does not hinge on particular assumptions on how aggregate savings come about it holds for any household sector allowing savings to grow at the same rate as aggregate output

a microfoundation for normalized ces production functions with factor augmenting technical change based on a tractable endogeneous technology choice framework we provide a microfoundation for aggregate normalized constant elasticity of substitution ces production functions with non neutral factor augmenting technical change in this framework firms are allowed to choose unit productivities of capital and labor optimally from a technology menu constructed under the assumption that unit factor productivities ufps are independently weibull distributed the weibull distribution itself is also microfounded here based on extreme value theory it is found to be an accurate and robust approximation of the true ufp distribution if technologies consist of a large number of complementary components

foreign law bonds can they reduce sovereign borrowing costs abstract governments often issue bonds in foreign jurisdictions which can provide additional legal protection vis a vis domestic bonds this paper studies the effect of this jurisdiction choice on bond prices we test whether foreign law bonds trade at a premium compared to domestic law bonds we use the euro area 2006 2013 as a unique testing ground controlling for currency risk liquidity risk and term structure foreign law bonds indeed carry significantly lower yields in distress periods and this effect rises as the risk of a sovereign default increases these results indicate that in times of crisis governments can borrow at lower rates under foreign law

the solow model with ces technology nonlinearities and parameter heterogeneity this paper examines whether nonlinearities in the aggregate production function can explain parameter heterogeneity in the solow growth regressions nonlinearities in the production technology are introduced by replacing the commonly used cobb douglas cd aggregated production specification with the more general constant elasticity of substitution ces specification we first justify our choice of production function by showing that cross country regressions favour the ces over the cd technology then by using an endogenous threshold methodology we show that the solow model with ces technology is consistent with the existence of multiple regimes copyright 2004 john wiley sons ltd

factor substitution and long run growth in the lucas model with elastic labor supply abstract we show that there exists a positive resp negative relationship between the elasticity of factor substitution and long run growth if the baseline ratio of physical capital to effective labor is above resp below its steady state value in the lucas model with elastic labor supply

appropriate technology and balanced growth we provide a general theoretical characterization of how firms technology choice on a technology frontier determines the long run elasticity of substitution between capital and labour we show that the shape of the frontier determines factor shares and the elasticity of substitution between capital and labour if there are adjustment costs to technology choice the short and long run elasticities differ with the long run always higher if the technology frontier is log linear the production function becomes cobb douglas in the long run but consistent with empirical evidence short run dynamics are characterized by gross complementarity the approach is easily implementable and yields a powerful way to introduce ces type production functions in macroeconomic models we provide an illustration within an estimated dynamic general equilibrium model and show that the use of our production technology provides a good match for the short and medium run behaviour of the u s labour share

economic growth technical change biases and the elasticity of substitution a test of the de la grandville hypothesis a recent development in microeconomic theory suggests that the size of the elasticity of substitution between factors is relevant to economic growth this study undertakes an empirical investigation of this proposition comparing two economies the united states and south korea the authors test results support the de la grandville hypothesis that the elasticity of substitution is a potent explanatory variable of economic growth this inquiry also provides a clue to the puzzle that the u s elasticity of substitution between labor and capital is well below unity whereas that of south korea is close to unity nonetheless the u s factor shares have tended to remain fairly stable whereas the distributive shares of south korea seem to have changed in favor of capital their findings indicate that a high elasticity of substitution is a bad signal for the distribution of income under the paradigm of modern technology copyright 1991 by mit press

endogenous aggregate elasticity of substitution abstract in the literature studying aggregate economies the aggregate elasticity of substitution aes between capital and labor is often treated as a constant or deep parameter this view contrasts with the conjecture put forward by arrow et al 1961 capital labor substitution and economic efficiency review of economics and statistics 43 225 250 that aes evolves over time and changes with the process of economic development this paper evaluates this conjecture in a simple dynamic multi sector growth model in which aes is endogenously determined our findings support the conjecture and in particular demonstrate that aes tends to be positively related to the state of economic development a result consistent with recent empirical findings

markups technology and capital utilization in the great recession abstract a two level ces aggregate production function is used to empirically analyze the fluctuations in markups technology and utilization in the great recession quarterly us gross output data suggest a strong markup increase limited technology movements and a low labor capital substitution elasticity

factor substitution and labor market friction in the united states 1948 2010 we re estimate the capital labor elasticity of substitution and the biased factor augmenting technological progress using a system approach for the aggregate u s economy from 1948 to 2010 due to

distributional effects of public policy choices this paper examines the effects of a budget neutral public spending allocation between public investment and private investment subsidy on inequality dynamics and intergenerational mobility in an environment with heterogeneous households and incomplete capital market

what is different about international lending an attempt is made to explain how enforceability is achieved n international debt contracts each bank announces the policy of denying credit to borrowers who default and chooses to adhere to it to maintain its reputation of being a tough bank to discipline its other borrowers loans are made by syndicates of banks in order to make the penalty for default severe enough so borrowers would choose not to default voluntarily the model predicts that the interest rate charged on loans is smaller for the larger borrowers also for any given borrower the interest rate may fall after each successive default article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

tariffs foreign capital and national welfare with sector specific factors abstract this paper examines the effect on national welfare of an endogenously determined inflow of foreign capital in the context of a well known model with sector specific inputs both for the case of unrestricted international trade and investment and in the presence of a tariff the second best problem of the optimal tax on foreign investment for a given tariff level is also investigated by application of the concept of shadow prices for primary factors in distorted open economies the results obtained are then related to analogous propositions derived previously for the standard heckscher ohlin model

bond restructuring and moral hazard are collective action clauses costly abstract recent emerging market crises have prompted debate over the costs and benefits of collective action clauses cacs in bond contracts cacs may facilitate the restructuring of repayment terms in the event of financial distress proponents of cacs argue they should lower borrowing costs while opponents contend that they lead to moral hazard and increased borrowing costs this paper examines the pricing of bonds with and without cacs using data for both primary and secondary market yields and finds no evidence that the presence of cacs has increased yields for either higher or lower rated issuers

do multinationals deteriorate developing countries export prices the impact of fdi on net barter terms of trade this paper explores the economic relationship between foreign direct investment fdi to developing countries and the export prices of the latter measured by terms of trade it is rst shown that economic theory suggests such a relationship for various reasons but is inconclusive about the direction of the eect to address this open issue empirically i analyze data on more than 50 developing countries throughout the period 1980 2008 using robust dynamic panel data methods the results show that fdi had an economically relevant and statistically signicant positive impact on developing countries net barter terms of trade a higher level of education in the developing country fosters this eect

what determines the elasticity of substitution between capital and labor a literature review this paper provides the first comprehensive review of the empirical and theoretical literature on the determinants of the elasticity of substitution between capital and labor our focus is on the two input constant elasticity of substitution ces production function we start by presenting four concise observations that summarize the empirical literature on the estimation of motivated by these observations the main part of this survey then focuses on potential determinants of capital labor substitution we first review several approaches to the microfoundation of production functions where the elasticity of substitution eos is treated as a purely technological parameter second we outline the construction of an aggregate elasticity of substitution aes in a multi sectoral framework and investigate its dependence on underlying intra and inter sectoral substitution third we discuss the influence of the institutional framework on the extent of factor substitution overall this survey highlights that the effective elasticity of substitution ees which is typically estimated in empirical studies is generally not an immutable deep parameter but depends on a multitude of technological non technological and institutional determinants based on these insights the final section identifies a number of potential empirical and theoretical avenues for future research

the aggregate production function of the finnish economy in the twentieth century this article uses the bayesian approach to estimate the parameters of the normalized constant elasticity of substitution ces function with factor augmenting technical progress directly rather than using derived first order conditions of profit maximizing behavior bayesian estimation is applied because maximum likelihood estimation is sensitive to the starting values of maximization and the parameters typically fail to converge to the global optimum because of a multimodal likelihood thanks to a convenient prior distribution the posterior simulation of parameters works fairly well the results indicate that in the long run over 100 years the parameters for the elasticity of substitution and capital income share are intimately linked to the shape of capital augmenting technological progress in particular the linear restriction excludes the possibility that the speed of capital augmenting technological progress converges to zero which seems to lead to upwardly biased estimates of the elasticity of substitution and income share parameters

factor substitution and convergence speed in the neoclassical model with elastic labor supply abstract we study the link between factor substitutability and the speed of convergence in the ramsey cass koopmans model with elastic labor supply and normalized ces production if the baseline value of capital per unit of effective labor is below its steady state value an increase in the elasticity of substitution reduces the convergence speed

foreign direct investment economic performance and trade liberalisation in a number of influential papers published by v n balasubramanyam and collaborators during the decade of the 1990s compelling arguments and supporting evidence was presented to indicate that export promoting trade and investment strategies attract more and more productive inflows of foreign capital than do import substituting strategies this paper revisits these hypotheses in the context of more recent cross section data and reports evidence to suggest that the earlier findings are robust

factor substitution and factor augmenting technical progress in the united states a normalized supply side system approach abstract using a normalized ces function with factor augmenting technical progress we estimate a supply side system of the u s economy from 1953 to 1998 avoiding potential estimation biases that

the statistical debate on the net barter terms of trade between primary commodities and manufactures a comment and some additional evidence i950 p s hypothesis according to this hypothesis the net barter terms of trade nbtt between primary products and manufactures have over the longrun exhibited a downward trend spraos presented a detailed and thorough analysis of both the adequacy of the various statistical series available to proxy the nbtt s behaviour over the long run and the wide range of conceptual including quality problems involved in such an exercise on the basis of his analysis spraos concluded that the balance of the evidence for the seventy year period ending with the outbreak of world war ii supported the p s hypothesis of a secular deterioration in the nbtt it should however be noted that the evidence also suggested that the particular series cho sen for analysis by prebisch i950 himself did appear to exaggerate possibly to a large extent the rate of deterioration however when the analysis was extended to include the post world war ii period spraos found that while the deteriorating tendency cannot be decisively refuted it is open to doubt when the record up to the i970s is taken into account i980 p i26 as we shall see in this paper closer scrutiny reveals a statistical problem with spraos s analysis and the purpose of this paper is to show that once appropriate action is taken to overcome this problem some quite strong evidence in support of the p s hypothesis emerges the paper is organised as follows section i briefly discusses spraos s methodology and section ii discusses an econometric issue arising from this analysis section iii presents our empirical evidence while section iv summarises the main findings of the paper

holdouts in sovereign debt restructuring a theory of negotiation in a weak contractual environment negotiations between a country in default and its international creditors are modeled as a dynamic game in an environment of weak contractual enforcement the country cannot borrow internationally until it settles with all creditors delay arises in equilibrium as creditors engage in strategic hold up the model a rms the conventional wisdom that delay increases with more creditors and with the advent of vulture creditors contrary to conventional wisdom putting collective action clauses into bond contracts may increase delay via free riding on negotiation costs even while preventing strategic holdup and reducing total negotiation costs secondary debt markets consolidate debt with high and disperse debt with low creditor bargaining power whether secondary markets reduce or increase delay depends on the interaction between strategic holdup and debt

international lending with moral hazard and risk of repudiation in this paper i examine the constrained optimal pattern of capital flows between a lender and a borrower in an environment in which there are two impediments to forming contracts the first impediment to contracting arises from the assumption that lenders cannot observe whether borrowers invest or consume borrowed funds this assumption leads to a moral hazard problem in investment the second impediment arises from the assumption that the borrower as a sovereign nation may choose to repudiate his debts the optimal contract is shown to specify that the borrowing country experience a capital outflow when the worst realizations of national output occur this seemingly perverse capital outflow forms a necessary part of the optimal solution to the moral hazard problem in investment

productivity versus elasticity a normalized constant elasticity of substitution production function applied to historical soviet data this study tests the extensive growth hypothesis which would attribute the soviet economic slowdown to low elasticity of substitution and over investment rather than deteriorating productivity growth to circumvent the low availability of data widely applicable new methods for estimating productivity and elasticity of substitution were developed based on the normalized constant elasticity of substitution ces production function one is an extended version of the solow residual calculation and the other is a direct estimation of the time varying parameter normalized ces production function the application of the methods to the soviet data showed a decreasing trend in productivity growth and a low elasticity of substitution of approximately 0 25 the results neither reject nor support the extensive growth hypothesis because of uncertainty in the interpretation of the low elasticity of substitution the results suggest that it is reasonable to assert that both deteriorating productivity growth and low