Factor Substitution and Macroeconomics


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.


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.


Miguel A. León-Ledesma, & Mathan Satchi 2015. "Appropriate Technology and the Labour Share," School of Economics Discussion Paper 15/05, University of Kent.

Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2015. "Production Technology Estimates and Balanced Growth," Oxford Bulletin of Economics and Statistics, vol. 77(1), pages 40-65, February.

Cristiano Cantore & Paul Levine, 2012, "Getting Normalization Right: Dealing with 'Dimensional Constants' in Macroeconomics," Journal of Economic Dynamics and Control, Volume 36, Issue 12, Pages 1931-1949.

Rainer Klump & Peter McAdam & Alpo Willman, 2012, "The normalized CES production function - theory and empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799

Cantore, C. & Ferroni, F. & León-Ledesma, M A., 2014. "The Dynamics of Hours Worked and Technology,” mimeo.

Cristiano Cantore & Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2014. "Shocking stuff: technology, hours, and factor substitution," Journal of the European Economic Association, Volume 12, Issue 1, pages 108-128.

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.

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