policy watch infrastructure investment and economic growth in the late 1980s david aschauer 1989 triggered a long overdue dialogue among economists and political leaders when he published a study arguing that much of the decline in u s productivity that occurred in the 1970s was precipitated by declining rates of public capital investment my own work confirmed these results munnell 1990a spending advocates seized on these findings as support for increased public investment the enthusiasm among policymakers for the early aschauer results was matched if not surpassed by skepticism on the part of many economists critics of these studies charged that the methodology was flawed that the direction of causation between public investment and output growth is unclear and that even if the historical empirical relationships were estimated correctly they provide no clear indications for current policy who s right what do we know and not know about the link between public infrastructure and productivity and what are the implications of these results for policy

the taylor principle fights back part ii abstract the existing literature holds that the taylor principle often leads to indeterminacy in new keynesian models that allow for capital accumulation and limited asset market participation this conclusion is special however to the case of continuous full employment when the assumption of perfect wage flexibility is relaxed very slightly so that the labor market clears quickly but not instantaneously determinacy is the norm the threat of indeterminacy is limited to a tiny irrelevant corner of the parameter space where the elasticity of labor supply is unusually high and real wage adjustment is unbelievably fast everywhere else the taylor principle guarantees a unique rational expectations equilibrium the dramatic difference in results reflects the sensitivity of the monetary transmission mechanism to the speed of adjustment in the labor market

production functions and distributions of unit factor productivities uncovering the link abstract we derive a reversible endogenous technology choice transform according to which firm level production functions and distributions of unit factor productivities are two sides of the same coin the cobb douglas function relates to pareto distributions and the ces to weibull distributions

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

how responsive is business capital formation to its user cost an exploration with micro data abstract the response of business capital formation to its user cost is critical to evaluating tax reform deficit reduction and monetary policy evidence for a substantial user cost elasticity however is sparse most evidence has been based on aggregate data although several recent studies with firm level data report substantial effects with a particularly rich micro dataset containing over 26 000 observations this paper explores what can be learned about the user cost elasticity while the results depend to some extent on the specification and econometric technique various diagnostics lead us to prefer a precisely estimated but small elasticity of approximately 0 25 this paper is dedicated to the memory of robert eisner who labored early and ably on uncovering the determinants of investment spending and highlighting the importance of the question found in the title of this paper

capital is back wealth income ratios in rich countries 1700 2010 how do aggregate wealth to income ratios evolve in the long run and why we address this question using 1970 2010 national balance sheets recently compiled in the top eight developed economies for the united states united kingdom germany and france we are able to extend our analysis as far back as 1700 we find in every country a gradual rise of wealth income ratios in recent decades from about 200 300 in 1970 to 400 600 in 2010 in effect today s ratios appear to be returning to the high values observed in europe in the eighteenth and nineteenth centuries 600 700 this can be explained by a long run asset price recovery itself driven by changes in capital policies since the world wars and by the slowdown of productivity and population growth in line with the s g harrod domar solow formula that is for a given net saving

an optimization model for a monopolistic firm serving an environmentally conscious market use of chemical reaction optimization algorithm this work considers a monopolist firm which faces the following twin challenges of serving an environmentally sensitive market the first challenge is the demand s elasticity to emissions and price to entice its emission conscious customers and generate higher demand the firm incrementally invests in cleaner production technologies it also adopts a voluntary limit on its emissions from transportation however such investments and penalty lead to the second challenge of reduced net profit to address above trade off a non linear programming nlp model with a maximization quadratic profit function has been formulated recently developed chemical reaction optimization algorithm with superior computational performance has been adopted to solve the nlp the output of the model provides near optimal monopolistic price best attainable reduction in manufacturing emissions through proportional investment and makes a choice of suitable mode of transportation for each type of product offered by the firm three types of sensitivity analyses were performed by varying contextual parameters customers emission elasticity penalty charged per unit emission and investment coefficient the results underpin the importance of investments in cleaner technologies and the need of financial aids for profit maximizing firms operating in cleaner markets this work provides a decision making tool to determine the near optimal degree of each of the above dimension in multiple business fronts

how misleading is linearization evaluating the dynamics of the neoclassical growth model this paper investigates the reliability of employing linearization to evaluate the dynamic adjustments to changes in productive government spending in a ramsey growth model if government expenditure is introduced as a flow and the dynamic adjustment is fast linearization may yield a reasonably good approximation to the true dynamics even for fairly large policy shocks if government expenditure assumes the form of a stock leading to more sluggish adjustment linearization may yield misleading predictions these errors occur at the beginning of the transition and weigh heavily in welfare calculations the implications for temporary shocks and the speed of convergence are also considered

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

dynamics of public infrastructure industrial productivity and profitability a restricted equilibrium framework is utilized to estimate the contribution of public investment in infrastructure to private sector profitability a restricted cost function in translog form which treats labor and materials as variable inputs and private capital and public sector capital stock in transportation communications and electricity as quasi fixed inputs is specified a system of non linear equations comprising variable cost function and derived input demand equations is estimated using data from 1970 to 1987 for twenty six mexican three digit manufacturing industries the divergence of private and public capital stocks from their static equilibrium levels is estimated the net rate of return to fixed factors is also calculated estimates of allocative efficiency are derived the study further provides estimates of short run and long run scale economies output elasticity of factors measures of productivity growth and technical change economic significance and policy implications of the findings are also presented copyright 1992 by mit press

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

federal reserve information and the behavior of interest rates this paper tests for the existence of asymmetric information between the federal reserve and the public by examining federal reserve and commercial inflation forecasts it demonstrates that the federal reserve has considerable information about inflation beyond what is known to commercial forecasters it also shows that monetary policy actions provide signals of the federal reserve s information and that commercial forecasters modify their forecasts in response to those signals these findings may explain why long term interest rates typically rise in response to shifts to tighter monetary policy jel e52 e43 d82 asymmetric information between the federal reserve and the public is a phenomenon that is often posited but rarely tested numerous models of central bank behavior for example show that the existence of asymmetric information has important implications for the effectiveness of policy and the consequences of dynamic inconsistency yet there

animal spirits financial crises and persistent unemployment this article uses a rational expectations model with multiple equilibrium unemployment rates to explain financial crises the model has equilibria where asset prices are unbounded above i argue that this is an important feature of any rational agent explanation of a financial crisis since for the expansion phase of the crisis to be rational investors must credibly believe that asset prices could keep increasing forever with positive probability i explain the sudden crash in asset prices that precipitates a financial crisis as a large shock to expectations that leads to a permanent increase in the unemployment rate

environmental taxation and the double dividend in decentralized jurisdictions this research explores the implications for jurisdictional welfare of sharing environmental rents between private and public consumption an integrated model is developed from research literatures on jurisdictional competition the double dividend and on the design of tax refund instruments this model shows that jurisdictional welfare increases as environmental rents are initially allocated towards public consumption yielding a double dividend but that this dividend may or may not continue as all rents are shifted to public finance when the double dividend occurs the rent allocation both improves the efficiency of the tax system and reduces the private public consumption distortion that decentralized jurisdictional decision making creates in some parameter configurations there is an optimal rental allocation between the private sector and the local government at this optimum environmental and fiscal policies are set at their first best levels and decentralized jurisdictional decision making is globally efficient if less rents are allocated to public finance than this optimum fiscal and environmental policies will be suboptimal whereas if too much rent is allocated for public consumption fiscal and environmental policies will be set at levels above the global efficiency standard these results illustrate the crucial importance of environmental rent sharing for the efficiency of jurisdictional decision making

public infrastructure private input demand and economic performance in new england manufacturing much of the current debate on the economic performance impacts of public infrastructure investment relates to the input specific effects of such investment in this article we explore these impacts by evaluating substitution patterns affecting private input use in new england manufacturing using a cost based methodology we find that in the short run public capital expenditures provide cost saving benefits that exceed the associated investment costs due to substitutability between public capital and private inputs over time however stimulating investment in private capital increases economic performance more effectively than public capital expenditures alone and in fact reduces the cost incentive for such expenditures in addition growth in output motivated by infrastructure investment increases employment opportunities because this growth overrides short run substitutability

labour policy instruments and the cyclical behaviour of vacancies and unemployment the standard mortensen pissarides mp model cannot match the observed elasticity of vacancies and unemployment in the data this paper shows that by introducing labour policy instruments the original mp model can replicate the observed fluctuations in unemployment and job vacancies in response to shocks these instruments reduce the benefit of forming a match thereby increasing the impact that shocks have on firms incentives to post vacancies and workers to accept job offers additionally the analysis shows that the design of labour policy instruments e g whether taxation is progressive or regressive has non trivial consequences on the model s performance

market set up in advance of federal reserve policy rate decisions textabstractthis paper considers the uncertainty associated with upcoming federal open market committee fomc announcements and the extent to which participants in the fed funds futures market prepare for such announcements before they actually occur we demonstrate that markets set up well in advance of known announcement days going back as far as six months prior to an fomc meeting as a result there is often less variation in fed funds futures prices in the period immediately preceding an fomc announcement despite greater volume of activity as the market has already incorpo rated anticipated signals we find that macro announcements and central bank officials speeches and congressional testimony are of comparable importance in addition while macro announcements have stronger effects when they are released during the fed s blackout period congressional testimony is more important when it coincides with days when important macro variables are released

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

sustainable infrastructure investment with labor only production abstract the purpose of this paper is to consider a partial equilibrium model for a sustainable infrastructure investment in a labor production economy we consider an inter temporal stackelberg game in a capital primitive economy where all capital investments are made by a central agency a government the government is assumed to have a number of objectives including sustainability of the infrastructure investments while firms are assumed to be myopic maximizing only current profits and paying taxes as a function of their returns both open loop and closed loop feedback stackelberg strategies are considered based on the analysis of the investment game some conclusions are drawn regarding the propensity to invest as a function of sustainability constraints the taxation rates and employment levels we then show that investments can tend to a constant level and thus strategic government goals of sustainability and employment growth can be planned only if labor costs and the general price index are steady or characterized by a set of conditions ensuring the attainability of the steady state investment

labor market institutions and aggregate fluctuations in a search and matching model abstract this paper explores the influence of labor market institutions on aggregate fluctuations it uses a dynamic stochastic general equilibrium model characterized by search and matching frictions in the labor market and nominal rigidities in the goods market it finds that firing costs and unemployment benefits can have substantial effects on aggregate fluctuations increasing firing costs decreases the volatility of output employment and job flows due to the reduction in the mass of jobs sensitive to disturbances and lower incentives for firms to hire and fire workers hence firms adjust to shocks mainly through prices causing inflation to become more volatile raising unemployment benefits has the reverse effect on aggregate fluctuations

aggregate instability under balanced budget consumption taxes a re examination we re examine the destabilizing role of balanced budget fiscal policy rules based on consumption taxation using a one sector model with infinitely lived households we consider a specification of preferences derived from jaimovich 2008 14 and jaimovich and rebelo 2009 15 which is flexible enough to encompass varying degrees of income effect when the income effect is not too large we show that there exists a laffer curve which explains the multiplicity of steady states and that non linear consumption taxation may destabilize the economy promoting expectation driven fluctuations if the elasticity of intertemporal substitution in consumption is sufficiently larger than one and the tax rate is counter cyclical with respect to consumption numerical illustrations also show that consumption taxation may be a source of instability for most oecd countries for a wide range of structural parameters configurations we finally prove the robustness of our conclusions if we consider a discrete time setup

will the true labor share stand up an applied survey on labor share measures labor s share of income is a key variable in economics it plays a leading role in analysis of in equality globalization technical change growth theories etc notwithstanding this broad application there are many different definitions of the labor share understanding and synthesizing those differences is the purpose of this applied survey empirical measures may vary reflecting the allocation of income components that cannot be directly ascribed to capital or labor we examine the alternative assumptions made in the literature in this regard and quantify and motivate the resulting discrepancies focusing mostly on us data we show that different measures can have very distinct properties in terms of the observed stochastic trends shares of short medium and long run variation and volatilities persistence and mean reversion properties and susceptibility to structural breaks for instance while short run properties of the surveyed labor share measures are relatively consistent across all definitions and countercyclical their medium and long run trends may diverge substantially and are procyclical to substantiate our analysis we document the implications of discrepancies in the empirical labor share definition for growth accounting analyzing the effect of technology shocks and for estimating inflation dynamics

small sample bias and adjustment costs the response of most stock variables e g capital housing consumer durables and prices to exogenous impulses involves a dynamic or short run reaction and a target or long run reaction the difference between these two is typically attributed to some form of adjustment cost in this paper i argue that the small sample problems of cointegrating procedures used to estimate the long run component are particularly severe when adjustment costs are important more precisely elasticity estimates will tend to be biased downward i illustrate the empirical relevance of this by showing that the target elasticity of capital with respect to its cost is severely downward biased when estimated with conventional ols cointegration procedures once this is corrected the elasticity of the u s capital output ratio to the cost of capital is found to be large and close to minus one copyright 1994 by mit press

the cyclical behavior of the price cost markup countercyclical markups constitute the key transmission mechanism for monetary and other demand shocks in new keynesian models this paper tests the foundation of those models by studying the cyclical properties of the markup of price over marginal cost the first part of the paper studies markups in the aggregate economy and the manufacturing sector we use bils s 1987 insights for converting average cost to marginal cost but do so with richer data we find that all measures of markups are either procyclical or acyclical moreover we show that monetary shocks lead markups to fall with output the second part of the paper merges input output information on shipments to the government with detailed industry data to study the effect of demand changes on industry level markups industry level markups are found to be acyclical in response to demand changes

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

joint production and pricing decisions for multiple products with cap and trade and carbon tax regulations abstract cap and trade and carbon tax regulations are the two main low carbon policies to curb carbon emissions this paper studies the joint production and pricing problem of a manufacturing firm with multiple products under cap and trade and carbon tax regulations and compares the effects of the two regulations on the total carbon emissions the firm s profit and social welfare the firm faces price sensitive demands and the demands for these products are independent firstly we find that the optimal number of products to be produced under cap and trade regulation carbon tax regulation is determined by the emission trading prices and the cap tax rate secondly we detect that the optimal cap tax rate is decreasing increasing or constant in the environmental damage coefficient finally we discover that the social welfare under carbon tax regulation is not less than that under cap and trade regulation although there is neither one regulation always inducing more profit and having advantages in curbing carbon emissions than the other one

are factor biases and substitution identifiable the canadian evidence revised productivity accounts recently released by statistics canada are used to estimate a klump mcadam willman normalized ces supply side system for the half century 1961 2012 the model permits distinct rates of factor augmenting technical change for capital and labour that distinguish between short term versus long term effects as well as a non unitary elasticity of substitution and timevarying factor shares the advantage of the canadian data for this purpose is that they provide a unified treatment of measurement issues that have had to be improvised in the us and european data used by previous researchers in contrast to previous results we find that an elasticity of substitution and distinct factor biases of technological progress are not well determined by the model for the canadian data the kmw model does not appear to provide a framework that overcomes the classic diamond mcfadden rodriguez non identification result that impossibility theorem is manifested in our findings not overcome by them jel classification c51 e23 e25 o30 o51

unemployment wage bargaining and capital labour substitution many economists believe that capital accumulation technical progress and labour force expansion have no lasting effect on unemployment this view rests on the empirically doubtful assumption that the elasticity of substitution between labour and capital is equal to unity i e production is cobb douglas using a simple model based on the work of layard nickell and jackman this paper demonstrates that with a lower elasticity of substitution the equilibrium unemployment rate is affected by all of the above factors it considers briefly how capital accumulation may be endogenised and what long run implications this has for unemployment copyright 1999 by oxford university press

communication by central bank committee members different strategies same effectiveness the paper assesses the communication strategies of the federal reserve the bank of england and the european central bank and their effectiveness we find that the effectiveness of communication is not independent from the decision making process the paper shows that the federal reserve has been pursuing a highly individualistic communication strategy amid a collegial approach to decision making while the bank of england is using a collegial communication strategy and highly individualistic decision making the european central bank ecb has chosen a collegial approach both in its communication and in its decision making assessing these strategies we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the federal reserve and the ecb this suggests that there may not be a single best approach to designing a central bank communication strategy

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

communication and monetary policy recent trends toward greater central bank independence and the adoption of formal inflation targeting by several countries have served to emphasize the importance of communication policy in this paper we explore some of the economic effects of public information that arise whenever public information serves the dual role of conveying fundamental information as well as serving as a focal point for better coordination more precise public information is a double edged tool while it is very effective in influencing actions through coordination sometimes it can be too effective and coordinate actions away from fundamentals copyright 2002 oxford university press

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

wide range estimation of various substitution elasticities for ces production functions at the sectoral level abstract this paper provides a broad range of various substitution elasticity values for sectoral nested constant elasticity of substitution ces production functions estimated through panel data techniques and using the world input output database wiod as the main data source although the related empirical literature has been growing over the recent years there is still no single study focused on a large scale estimation of various both product and industry specific elasticities with the use of an internally consistent database and a common methodology for all the production function nests this paper constitutes an attempt to fill this gap the obtained estimates may subsequently be used by computable general equilibrium cge modellers in their applied research covering fiscal labour market trade energy or environmental topics significant heterogeneity in the estimated elasticity values is observed between various industries products as well as between various nests of the production function this constitutes a strong argument against the arbitrary use of leontief and or cobb douglas specifications in multi sector cge models

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

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

dispersed communication by central bank committees and the predictability of monetary policy decisions the paper asks whether members of central bank decision making committees should communicate with the public in a collegial manner by conveying the consensus or majority view of the committee or in an individualistic way by providing the diversity of views among the committee members it finds that more active as well as more consistent communication by committee members improves the predictability of monetary policy decisions significantly this effect is sizeable as communication dispersion across committee members accounts on average for one third to one half of the market s prediction errors of fomc policy decisions moreover more active and more consistent communication are found to also reduce the degree of uncertainty about the future path of interest rates these findings suggest that a collegial communication which stresses the consensus view on policy inclinations can enhance the effectiveness of central bank communication

measuring the contribution of public infrastructure capital in sweden the authors purpose is to examine ways of evaluating and measuring the contribution of public infrastructure capital to private sector output and productivity growth in sweden they do this by specifying and implementing empirically a number of alternative econometric models using annual data for sweden from 1960 to 1988 applying a dual cost function approach they find that increases in public infrastructure capital ceteris paribus reduce private sector costs the authors compute that amount of public infrastructure capital that would rationalize the cost savings incurred by the private business and manufacturing sectors and find that the amount that can be rationalized in this manner is less than what was in fact available in 1988 but that the extent of excess public infrastructure capital has been falling in the 1980s copyright 1992 by the editors of the scandinavian journal of economics

purdah on the rationale for central bank silence around policy meetings many central banks share the practice of purdah a guideline of abstaining from communication around policy meetings although seemingly contradicting the virtue of transparency by withholding information precisely when it is sought after intensely it has been justified on grounds that such communication may create excessive market volatility this paper assesses the purdah for the federal reserve and confirms that financial markets are substantially more sensitive to central bank communication around policy meetings short term interest rates react three to four times more strongly in the purdah before federal open market committee meetings than otherwise and volatility increases compared to a reduction otherwise

estimating elasticities of substitution with nested ces production functions where do we stand abstract prompt by an increasing interest by climate change modelers a rich literature estimating elasticities of substitution in a nested ces production framework has recently developed this article reviews such literature we critically describe the nesting structures estimation approaches data sources and aggregation econometric techniques and types of substitution elasticities used by previous literature to offer a comprehensive description of the various options available to a researcher attempting this estimation we also provide suggestions for potential improvements to the estimation process in particular we warn researchers to use ces production functions with caution in empirical applications given their restrictive build in assumptions

financial factors and investment in belgium france germany and the united kingdom a comparison using company panel data we construct company panel data sets for manufacturing firms in belgium france germany and the united kingdom covering the period 1978 1989 these data sets are used to estimate empirical investment equations and to investigate the role played by financial factors in each country a robust finding is that cash flow and profits terms appear to be both statistically and quantitatively more significant in the united kingdom than in the three continental european countries this is consistent with the suggestion that financial constraints on investment may be relatively severe in the more market oriented u k financial system

the canadian oil sands industry under carbon constraints abstract we investigate the impact of climate policies on canada s oil sands industry the largest of its kind in the world deriving petroleum products such as gasoline and diesel from oils sands involves significant amounts of energy and that contributes to a high level of co2 emissions we apply the mit emissions prediction and policy analysis eppa model a computable general equilibrium model of the world economy augmented to include detail on the oil sands production processes including the possibility of carbon capture and storage ccs we find 1 without climate policy annual canadian bitumen production increases almost 4 fold from 2010 to 2050 2 with climate policies implemented in developed countries canadian bitumen production drops by 32 to 68 from the reference 4 fold increase depending on the viability of large scale ccs implementation and bitumen upgrading capacity moves to the developing countries 3 with climate policies implemented worldwide the canadian bitumen production is significantly reduced even with ccs technology which lowers co2 emissions at an added cost this is mainly because upgrading bitumen abroad is no longer economic with the global climate policies

ces technology and business cycle fluctuations we contribute to an emerging literature that brings the constant elasticity of substitution ces specification of the production function into the analysis of business cycle fluctuations using us data we estimate by bayesian maximum likelihood methods a standard medium sized dsge model with a ces rather than cobb douglas cd technology we estimate a elasticity of substitution between capital and labour well below unity at 0 15 0 18 in a marginal likelihood race ces decisively beats the cd production and this is matched by its ability to fit the data better in terms of second moments we show that this result is mainly driven by the implied fluctuations of factor shares under the ces specification the ces model performance is further improved when the estimation is carried out under an imperfect information assumption hence the main message for dsge models is that we should dismiss once and for all the use of cd for business cycle analysis

anonymity efficiency wages and technological progress although the industrial revolution is often characterized as the culmination of a process of commercialisation the precise nature of such a link remains unclear this paper provides an analysis of one such link the role of commercialisation in raising wages as impersonal labour market transactions replace personalized customary relations in the presence of an aggregate capital externality we show that the resulting shift in relative factor prices will under certain conditions lead to higher capital intensity in the production technology and hence a faster rate of technological progress we provide historical evidence using european data to show that england was among the most urbanized and the highest wage countries at the onset of the industrial revolution the model highlights the effects of changes in the availability of information typical of a modernising country on efficiency wages and technological 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

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

does central bank communication signal future monetary policy in a post crisis era the case of the ecb abstract we examine the european central bank s ad hoc communication and explore how it informs future monetary policy decisions using the rich dataset of the inter meeting verbal communication by the members of the european central bank s governing council between 2008 and 2016 we construct a measure of communication evaluating its inclination towards easing tightening or maintaining the monetary policy stance we find that this measure provides useful additional information about future monetary policy decisions even when we control for market based interest rate expectations and lagged decisions our results also suggest that in particular communication related to conventional measures and or by the ecb president explain the future ecb rate changes well all aforementioned results hold also in the environment of the zero lower bound overall these results point to the importance of transparent communication in understanding the future course of monetary policy

infrastructure investment a review essay economists try not to be faddists but they often cannot help themselves while work on a topic should mirror the prospective importance of the topic that situation seems to occur with disappointing frequency instead the usual pattern is that some reasonably important topic will be totally ignored for the longest time then recognized and then the subject of a flurry of work all out of proportion to its likely long run importance nowhere has this speculative bubble of economic research been more clearly illustrated than with infrastructure investment macroeconomists havelong felt that the stock of public capital is an important factor input in the production of total output macroeconomists have known that u s productivity growth slowed dramatically in about 1973 and macroeconomists should have known that united states investment in public capital has been down since the late 1960s yet analysis of the u s productivity slowdown completely ignored infrastructure investment for the first fifteen years of this slowdown concentrating instead on energy prices social regulation the composition of the work force research and development different rates of obsolescence of the private capital stock and any number of other matters the public capital stock was hardly ever even mentioned as a potential factor in the productivity slowdown aschauer changed all that he wrote a series of papers 1989a 1989b 1989c that put these two movements together econometrically infrastructure investment turned down and aggregate productivity turned down slightly later both in the united states and in some other developed countries his work hit the magic button those who had worried about the productivity puzzle for fifteen years welcomed a new suspect those who were worried about low rates of u s national saving welcomed a new way to make their argument even more forcefully than with official figures on saving and investment which do not count infrastructure investment as investment political liberals and liberal politicians saw a way to rescue government spending and projects from the assaults of reaganism and even a way to avoid oth

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

factor complementarity and labour market dynamics abstract we propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions deep habits and a ces production function the model successfully replicates the cyclical properties of labour market variables in the us economy for three main reasons first two of the endogenous mechanisms of the model factor complementarity and unemployment benefits play a key role for explaining the amplification in unemployment and vacancies second deep habits have a smaller but significant role as an endogenous mechanism third capital augmenting productivity investment specific and matching efficiency innovations explain large part of the variation in labour market variables

vacancy posting job separation and unemployment fluctuations abstract what is the relative importance of hiring and separation in driving unemployment fluctuations this paper presents a framework to decompose the moments of unemployment and study the respective contributions of vacancy posting a measure of firms hiring efforts and separation separation accounts for about 40 of unemployment s variance compared to 60 for vacancy posting and contributes to about 60 of unemployment steepness asymmetry the fact that unemployment increases faster than it decreases further while vacancy posting is on average the most important contributor of unemployment fluctuations the opposite is true around business cycle turning points when separation is responsible for most of unemployment movements

avoiding mis estimation of the ces function unit matters abstractwe demonstrate that unit errors of measurement will lead to significant biases in estimating the constant elasticity of substitution ces function monte carlo simulations show that estima

building a composite help wanted index abstract this paper builds a measure of vacancy posting over 1951 2009 that captures the behavior of total print and online help wanted advertising and can be used for time series analysis of the us labor market

an evaluation of the investment environment in international logistics zones a taiwanese manufacturer s perspective abstract with the rapid development of international logistics the role of international logistics zones has become increasingly important this study evaluated the importance of investment environment factors namely political infrastructure cost and market factors for firms intention to invest in international logistics zones a structural equation modeling sem approach was employed to analyze respondents foreign direct investment fdi intention results indicated that market cost and infrastructure factors have a positive effect on firms intention to invest in international logistics zones the influence of political factor on firms investment intention was not supported in this study theoretical and practical implications of the findings for firms foreign direct investment in international logistics zones are discussed

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 dynamics of hours worked and technology the response of hours worked to technology shocks in the postwar us economy has increased over time we offer a structural interpretation of this important time varying macroeconomic moment the time varying patterns captured by a structural var are consistent with those obtained from a parsimonious rbc model with a less than unitary elasticity of substitution between capital and labour the observed changes in the response of hours are attributable to increases in the magnitude of the degree of capital labour substitution finally we conjecture that the observed time variation in is related to changes in the skill composition of the work force and biases in technological change

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

measurable economic consequences of investments in flexible capacity abstract investments in flexible capacities are large it is not surprising that a solid economic infrastructure is a precondition from the strategic prospective the structural support will rest on qualitative grounds yet the central problem posed in the present article is how the economic consequences of investments in flexible capacities can actually be measured it is worked out in three steps to begin with the just in time concept is placed in an integral framework of goods flow control this is essential because it will be found that without this analysis there is a danger that the estimate of the positive effects will be too optimistic subsequently we introduce a concrete production situation lastly for the selected production situation the concrete economic consequences of a flexible capacity investment will be examined cor starting point is that the investment will in fact lead to an adjustment of the logistics concept for that reason the maximum just in time advantages can be realised at the same time the possible misrepresentation resulting from traditional costs calculation will be examined

the role of shocks and institutions in the rise of european unemployment the aggregate evidence two key facts about european unemployment must be explained the rise in unemployment since the 1960s and the heterogeneity of individual country experiences while adverse shocks can potentially explain much of the rise in unemployment there is insufficient heterogeneity in these shocks to explain cross country differences alternatively while explanations focusing on labour market institutions explain current heterogeneity well many of these institutions pre date the rise in unemployment based on a panel of institutions and shocks for 20 oecd nations since 1960 we find that the interaction between shocks and institutions is crucial to explaining both stylised facts

economic fluctuations in the u s and euro area quantifying the contribution of technical change this article aims at quantifying the contribution of technical change to cyclical fluctuations in the u s and euro area we distinguish technical progress in labor augmenting and capital augmenting change to this end we derive and estimate a new keynesian dsge model embodying a constant elasticity of substitution ces production function for both areas our main findings are i capital augmenting progress is the main source of technical change volatility ii labor augmenting shocks give a negligible contribution to the variance of output iii technical change of both types explains more economic fluctuations in the u s than in the euro area and iv historical decomposition of gdp growth over our sample period 1980 2008 shows that capital augmenting progress is one of the key drivers of the business cycle

capital labor substitution structural change and the labor income share abstract recent work has documented declines in the labor income share in the united states and beyond this paper documents that this decline was more pronounced in manufacturing than in services in the u s and in a broad set of other industrialized economies and shows that a model with cross sectoral differences in productivity growth and in the degree of capital labor substitutability is consistent with these trends we calibrate the model exploiting additional information on the pace of structural change from manufacturing to services on which the model also has predictions we then conduct a decomposition to establish the relative importance of several potential drivers of changes in factor income shares and structural change that have been proposed in the literature this exercise reveals that differences in the degree of capital bias of technical change across sectors combined with differences in substitution possibilities are key determinants of the observed patterns

technology utilization and inflation what drives the new keynesian phillips curve we argue that the new keynesian phillips curve literature has failed to deliver a convincing measure of real marginal costs we start from a careful modeling of optimal price setting allowing for nonunitary factor substitution nonneutral technical change and time varying factor utilization rates this ensures the resulting real marginal cost measures match volatility reductions and level changes witnessed in many u s time series the cost measure comprises conventional countercyclical cost elements plus procyclical and covarying utilization rates although procyclical elements seem to dominate the components of real marginal cost components are becoming less cyclical over time incorporating this richer driving variable produces more plausible price stickiness estimates than otherwise and suggests a more balanced weight of backward and forward looking inflation expectations than commonly found our results challenge existing views of inflation determinants and have important implications for modeling inflation in new keynesian models

optimal central bank transparency should central banks increase their degree of transparency any further we show that there is likely to be an optimal intermediate degree of central bank transparency up to this optimum more transparency is desirable it improves the quality of private sector inflation forecasts but beyond the optimum people might 1 start to attach too much weight to the conditionality of their forecasts and or 2 get confused by the large and increasing amount of information they receive this deteriorates the perceived quality of private sector inflation forecasts as a result inflation is set in a more backward looking manner resulting in higher inflation persistence by using a large scale panel data set on the transparency of central banks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized our results indicate that while several central banks would benefit from further transparency increases some already have reached the optimal level

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

is public expenditure productive abstract this paper considers the relationship between aggregate productivity and stock and flow government spending variables the empirical results indicate that i the nonmilitary public capital stock is dramatically more important in determining productivity than is either the flow of nonmilitary or military spending ii military capital bears little relation to productivity and iii a core infrastructure of streets highways airports mass transit sewers water systems etc has most explanatory power for productivity the paper also suggests an important role for the net public capital stock in the productivity slowdown of the last fifteen years

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

the reaction of asset markets to swiss national bank communication abstract in this paper we analyze high frequency movements in swiss asset markets in reaction to real time communication by the swiss national bank our analysis of central bank communication encompasses monetary policy announcements speeches and interviews we examine the reactions of the currency market the bond market and the stock exchange the evidence suggests that speeches and interviews along with monetary policy announcements engender a significant price reaction this paper sheds light on the relevance of communications other than monetary policy announcements

confidence crashes and animal spirits this article is an attempt to reformulate what i take to be two key insights from keyness general theory keynes 1936 the first is that there is something profoundly different about the labour market from most other markets in the economy the second is that the beliefs of participants in the asset markets have an independent influence on economic activity in the language of modern dynamic general equilibrium theory we would say that there is a continuum of labour market equilibria and that beliefs about the value of the stock market select an equilibrium the general theory contains many ideas some of which are internally inconsistent and keynes did not try to reconcile his theory with walrasian economics that task was carried out by a group of interpreters including hansen 1936 and hicks 1937 the current dominant paradigm new keynesian economics originated with the third edition of samuelson s 1955 undergraduate textbook in which he introduced the idea of the neoclassical synthesis according to this doctrine the economy is keynesian in the short run but classical in the long run the short run is defined as the period over which not all prices have had time to adjust to their walrasian levels this article introduces a different interpretation of the key ideas from the general theory 1 although my work is inspired by keynesian economics this article is not about the history of thought i offer a way of formulating the idea that market economies are not inherently self stabilising without assuming that prices or wages are prevented from adjusting to their equilibrium levels by some kind of friction instead i claim that high persistent unemployment is a potentially permanent feature of a market economy in a steady state equilibrium

the soviet economic decline soviet growth from 1960 to 1989 was the worst in the world after we control for investment and human capital the relative performance worsens over time there is some evidence that the burden of defense spending modestly contributed to the soviet debacle the declining soviet growth rate from 1950 to 1987 can be accounted for by a declining marginal product of capital with a constant rate of growth of total factor productivity the soviet reliance on extensive growth rising capital to output ratios was no greater than that of market economies such as japan and the republic of korea but a low elasticity of substitution between capital and labor implied especially acute diminishing returns to capital compared with the case in market economies copyright 1995 by oxford university press

federal reserve communications and newswire coverage in this article we explore the determinants of newswire coverage of federal reserve fed communications our sample covers all 344 forward looking communications made in the period may 1999 to may 2004 we find first that there is a higher likelihood of newswire coverage for monetary policy reports and speeches by chairman greenspan than for testimony and speeches by other fed members furthermore communications with an explicit monetary policy inclination or tone different from the current interest rate path are particularly likely to be covered however the release of important macroeconomic news reduces the likelihood of newswire coverage second speeches by regional fed presidents are relatively less likely to be reported than speeches by board members nevertheless newswire coverage of fed president speeches is more likely if central bank communication is stale finally our results indicate that ben bernanke played a distinguished role even before his chairmanship

paying for public inputs with public consumption goods pareto optimality can be achieved in equilibrium through lindahl pricing this requires that each consumer pays a price proportional to his marginal utility from the public good the marginal cost of providing the good is then equated to the sum of the marginal benefits some public goods serve as inputs into production processes rather than as consumption goods the lighthouse is an example efficiency in an economy with public intermediate goods requires that the marginal cost of providing them equals the sum of their marginal benefits to firms by analogy with the case of public consumption goods it might seem that lindahl pricing can be extended to public intermediate goods by requiring that firms pay in proportion to the marginal contribution of these goods to profits agnar sandmo 1972 explicitly proposes this for convex technologies for nonconvex technologies that arise with an important class of production functions essentially those exhibiting atmosphere externalities in the phrase of james meade 1952 lindahl pricing for such public inputs is infeasible the principal result derived here is a sim

productiveness and welfare implications of public infrastructure a dynamic two sector general equilibrium analysis abstract this paper develops a dynamic general equilibrium model that provides an internally consistent micro foundations framework where various effects of infrastructure policy changes can be studied devoting additional resources to infrastructure investment can payoff in terms of sizable increases in gdp and private investment in addition to this the model also makes predictions concerning changes in the welfare of agents resulting from additional infrastructure investment specific policy recommendations that attain highest welfare gains are computed the recommendation is that on average an additional 4 of gdp per year should be devoted to public investment in the latin american countries in the sample

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

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

a fiscal stimulus and jobless recovery we analyze the effects of a government spending expansion in a dynamic stochastic general equilibrium model with mortensen pissarides labor market frictions deep habits in private and public consumption investment adjustment costs a constant elasticity of substitution ces production function and adjustments in employment at both intensive and extensive margins the combination of deep habits and ces technology is crucial the presence of deep habits magnifies the responses of macroeconomic variables to a fiscal stimulus while an elasticity of substitution between capital and labor in the range of available estimates allows the model to produce a scenario compatible with the observed jobless recovery

open mouth operations abstract this paper explains how central bank statements rather than open market operations can be used to implement monetary policy in the extreme policy instruments can be held constant and yet interest rates will evolve along the path desired by the central bank we show how the recent implementation of monetary policy in new zealand works in this way using announcement data from new zealand we find that open mouth operations lead to large changes in interest rates across all maturities and these changes cannot be explained by open market operations implications are drawn for monetary policy in other jurisdictions

social value of public information comment morris and shin 2002 is actually pro transparency not con the main result of morris and shin 2002 restated in papers by amato morris and shin 2002 and amato and shin 2003 and commented upon by the economist 2004 has been presented and interpreted as an anti transparency result more public information can be bad however some scrutiny of the result shows that it is actually pro transparency except in very special circumstances more public information is good furthermore for a conservative benchmark of equal precision in public and privateinformation social welfare is higher than in as ituation without public information

central bank swap line effectiveness during the euro area sovereign debt crisis abstract the federal reserve re established a swap line with the european central bank in response to the international liquidity stresses created by the euro area sovereign debt crisis we examine the swap line s effectiveness in addressing these stresses in 2010 11 we find that announcements about the swap line had a significant effect in reducing euro dollar fx swap spreads during the 2010 11 crisis but that the swap line only had limited effectiveness in alleviating the stresses probably owing to some stigma being attached to its use