Factor Substitution and Macroeconomics
Summary
Most macroeconomic models, especially models of economic fluctuations, ignore the role of capital-labour substitution and non-neutral technical change for macroeconomic outcomes such as employment, output, and inflation. Despite being an established issue in growth theory, almost no effort has been devoted to consider the role of the elasticity of capital-labour substitution (ES) in macroeconomic models of the business cycle. However, they are of crucial importance because they determine changes in the distribution of income between capital and labour, unemployment dynamics, the effect of technology shocks, and can influence optimal decisions in monetary and fiscal policies. Our project, hence, aims at filling this important gap in the literature and our understanding of macroeconomic dynamics.
Objectives
Specifically, the core objective is to formally analyse how substitution possibilities between capital and labour affect relevant macroeconomic outcomes such as business cycles, unemployment level and persistence, factor income distribution, and the effect of macroeconomic policies.
Publications
Cristiano Cantore & Paul Levine, 2011. "Getting Normalization Right: Dealing with 'Dimensional Constants' in Macroeconomics," School of Economics Discussion Papers 0511, School of Economics, University of Surrey.
Rainer Klump & Peter McAdam & Alpo Willman, 2011. "The normalized CES production function - theory and empirics," Working Paper Series 1294, European Central Bank
Cantore, C. & Ferroni, F. & León-Ledesma, M A., 2011. "Interpreting the Hours-Technology time-varying relationship," Working papers 351, Banque de France.
Cristiano Cantore & Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2010. "Shocking stuff: technology, hours, and factor substitution," Working Paper Series 1278, European Central Bank.
Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-57, September.
