The long-term sucCESs of the neoclassical growth model

Abstract

In this paper, we seek to re-establish the link between the CES production function and neoclassical growth theory. We did so in three dimensions. First, we reviewed 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 argued that the importance of the CES function in growth theory is intimately linked to 'normalization'. Finally, we examined the data congruence between CES functions and recent growth patterns in US and euro-area economies, where we apply CES functions with factor-augmenting and time-varying technical progress.

Openness, Efficiency and Technology: An Industry Assessment

“…This confirms and underscores the biases inherent in the mechanical use of Cobb Douglas commonly voiced at the aggregate level (e.g. Klump et al ., ,b; Chirinko, ) but now apparent at the industry level.…”

“…For example, at the aggregate level Klump et al . () and Chirinko () suggest 0.4–0.6 as a benchmark aggregate elasticity range for the US. Likewise, factor income shares (again at aggregate and disaggregate level) typically exhibit such protracted swings as to render Cobb Douglas grossly counter factual (see Jones, ; McAdam and Willman, in press).…”

Estimates of the Long‐Run Growth Rate of Australia

“…We apply our methodology to Australian productivity database prepared by Diewert and Lawrence (2005, p. 15). The output index is formed by aggregating the quantities of the consumer commodity, government consumption, exports, investment goods, inventory changes and the negative of the 1 This specification has been used by many researchers including Klump and Preissler (2000), Klump et al (2007 and Klump and Saam (2008). import quantity.…”

Sectoral Elasticity of Substitution and Returns to Scale in South Africa

“…Elasticity of substitution enters into the growth equation when the income shares of labour and capital are determined. Assuming labour and capital as the only factors of production, the income shares of each of these factors have been assumed to remain constant over the years because of the accordance of the Cobb‐Douglas (CD) function with the most prominent stylised facts of long‐term economic development (Klump et al. , 2007).…”

“…4 Elasticity of substitution enters into the growth equation when the income shares of labour and capital are determined. Assuming labour and capital as the only factors of production, the income shares of each of these factors have been assumed to remain constant over the years because of the accordance of the Cobb-Douglas (CD) function with the most prominent stylised facts of long-term economic development (Klump et al, 2007). This might be a very restrictive assumption, since changes in factor prices and technology may induce factor income shares to vary across time (Lee, 1970), making the use of the CD functional form inappropriate.…”