Econometric Estimation of the Capital Stock and the Production Function: The Case of the Bahamas, Barbados, Jamaica, and Suriname

Abstract

Most studies of total factor productivity (TFP) and long-term production functions use capital stock time series obtained from ad hoc estimates of the rate of depreciation and the initial capital stock. This paper introduces a methodology that allows the simultaneous econometric estimation of the capital stock, the production function parameters, the rate of depreciation, and the initial capital stock. The proposed methodology, using the underlying cost function to the production function, allows for the incorporation of information about the relative prices of the factors of production and the possibility of having variable depreciation rates over time. The proposed methodology is applied to the case of the Bahamas, Barbados, Jamaica, and Suriname for the period 1989-2019 using national accounts data published by the statistical services of these countries.