Segmented Exchange Markets and U.S. Monetary Spillovers: Beyond the Trilemma

JN recent years, economists have presented empirical evidence that improvements in efficiency have accounted for most of the growth in aggregate output in the United States and many other countries during the past half century. Robert M. Solow has presented a Cobb-Douglas production function model in which he explicitly assumes that this increased efficiency (technical progress) is due to improvements which are embodied in new physical equipment.' The model is easily extended to the case in which improvements may be embodied in new physical equipment, or may be due to other causes (i.e., disembodied improvements).2 Furthermore, Solow has demonstrated that the explicit assumption that technical progress must be embodied in new physical equipment can be incorporated in a constant elasticity of substitution (CES) production function model.3 Such a model is more general than the embodied Cobb-Douglas model in that the latter implies that the elasticity of substitution is not only a constant, but also equal to one. Solow did not consider the case in which technical progress may also be disembodied, but again it is easy to incorporate this into the CES model. This will be done below. The purpose of this paper is to point out one striking difference between Solow's Cobb-Douglas, and his CES model, when it is assumed that technical progress may be either embodied or disembodied. Embodied technical progress in the Cobb-Douglas model has no influence on the elasticities of output with respect to labor and with respect to the net capital stock. In that model, it is not possible to isolate the influence of embodied technical progress from that of disembodied progress. In the case of the CES model, however, the elasticity of output with respect to capital relative to the elasticity with respect to labor is influenced by the rate of embodied progress. Another feature of the CES model is that it is possible to state output per labor unit as a function of the marginal product of labor, and of a time shift factor which is accounted for only by disembodied technical progress. Given these facts, given data on output, labor, and the net capital stock, and finally, given the assumption that labor and capital tend to be paid their marginal products, it is possible to obtain upper and lower bound estimates of the influence of embodied and disembodied progress on output. The procedure in this paper will be: first, to outline the derivation of the Cobb-Douglas model in which progress is assumed to be either embodied or disembodied; second, to describe the extension to the CES model; and third, to demonstrate how the CES model allows us to distinguish between the effects of embodied and disembodied progress on output, and to discuss some of the implications of the CES model.

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.

VAR-Ing Monetary Policy in Poland

Interpreting the Hours-Technology Time-Varying Relationship

In this article we shall give a generalization of Cobb–Douglas, Constant Elasticity of Substitution (CES), Lu–Fletcher, Liu–Hildebrand, Variable Elasticity of Substitution (VES) and Kadiyala production functions. We compute the principal indicators such as the marginal products, the marginal rate of substitution, the elasticities of factors and the elasticity of substitution. Finally, we formulate three theorems of characterization for the functions with a proportional marginal rate of substitution, with constant elasticity of labour and for those with constant elasticity of substitution (for n = 1).

Capital controls and the real exchange rate: Do controls promote disequilibria?

This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. In terms of methodologies, it combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country's interest rate if it is to focus exclusively on growth, inflation, and real exchange rate stability. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. In terms of empirical findings, we differ from the existing literature and document patterns of "2.5-lemma" or something between a trilemma and a dilemma: without capital controls, a flexible exchange rate regime offers some monetary policy autonomy when the center country tightens its monetary policy, yet it fails to do so when the center country lowers its interest rate. Capital controls help to insulate periphery countries from monetary policy shocks from the center country even when the latter lowers its interest rate.

The Translog cost function extimation approach has been used in this paper, to estimate important industrial policy parameters. The translog approach differs from the more frequently used techniques viz, the generalized Cobb-Dauglas production function (C0D) approach and the Constant Elasticity of Substitution (CES or ACMS) approach, in that restrictive assumptions about the elasticity of substitution between factors do not have to be made. The translog approach also has the additional advantage of providing cost shares for each factor, pair-wise elasticity of substitution, and own and cross price elasticities for the inputs. Thus, a whole range of policy parameters can be simultaneously estimated. While estimates of elasticity of substitution between capital and labour, and capital and materials are not significantly different from one, the parameter estimate is significantly below unity for substitution between labour and materials. The cross price elasticities show that the three inputs capital, labour and materials are complements in production. The own price elasticities have the appropriate signs and are all significantly below one. As expected the cost share of raw materials is the largest (78.9%) followed by labour’s share (14.6%) and capital’s share (6.5%). Alternative hypotheses regarding scale economies have also been tested. Data from the manufacturing sector of Bangladesh for the period 1969/70 to 1978/79 have been used.

This article analyzes the constant elasticity of substitution (CES) production function when there are increasing returns to scale and the elasticity of substitution exceeds 1, which I refer to as the explosive case of the CES. For this explosive case of the CES, the article demonstrates a new and surprising result: marginal and average products of labor and capital approach infinity as either labor or capital approach infinity. Obviously, in this explosive case of the CES, the law of diminishing marginal returns is eventually violated in a dramatic way. Some implications of this result for growth theory are discussed. The article concludes by deriving, for this explosive case of the CES, lower and upper bounds for the capital labor ratio which are consistent with the law of diminishing marginal returns.

Measuring Monetary Policy Shocks in a Small Open Economy

In the past, growth models have been constructed and analyzed with the help of a production function subject to certain restrictive features. For quite some time, the Cobb-Douglas production function (CD) with its input exponents adding upto unity and a unitary elasticity of substitution were mostly used by the economists for analysis. In recent times, the constant elasticity of substitution production function (CES) which includes CD, as well as Leontif production function as its special case has been widely used in various studies. One major limitation of this production function is that the elasticity of substitution parameter is not variable along an isoquant, though it can take different values for different values for different industries. We have made an attempt to test whether the estimated values of elasticity of substitution between labour and capital for a sector tend to change from one year to another and also whether it is CD or CES production function that characterizes a particular sector.

Purpose: To specify a Variable Elasticity of Substitution function (VES), in which the estimated Elasticity of Substitution (ES) can give some implications for the tendency of economic growth in the Vietnames manufacturing sector. Design/Methodology/Approach: The contribution and the relevant methodology is based on the Bayesian approach having some advantages over the frequentist method: (i) the simulation and prediction results are more reliable in Bayesian analysis due to combining prior knowledge about parameters with obverved data to compose a posterior model, whereas the frequentist approach is based only on available data; (ii) in probability sense, Bayesian credible intervals have a straightforward interpretation compared to frequentist confidence intervals. The Bayesian nonlinear regresion performed is suitable for fitting production functions and depicting economic growth. Findings: The specified VES function has the ES greater than one and this finding contradicts many previous empirical studies in the growth theory. This result points to the possibility of unbounded endogenous growth in the Vietnamese manufacturing sector. Practical implications: Based on the empirical results, in order to realize the possibility of endogenous growth for the studied Vietnamese manufacturing sector, policies of enforcing investment are needed. To raise the level of science and technique, as well as human capital of the Vietnamese enterprises, at the same time, there is great necessity to encourage R&D activities in both the private and public sectors. Originality/Value: Although this study organically builds upon recent studies about the link between the VES, the elasticity of factor subsitution and economic growth, its results proved that the VES is more appropriate than the Cobb-Douglas and the Constant Elasticity of Substitution (CES) to explain economic growth in the view of capital-labor relationship.

This paper clarifies the concepts of factor-augmenting, factor-biased and factor-saving technical change by tracing back to the original definitions and using CES production function. Make a comparison between Hicks factor-biased technical change and Harrod factor-biased technical change. Use time-series data of China from 1978 to 2008 to estimate elasticity of substitution between capital and labor, then compute the value of factor-augmenting and factor-biased technical change. The results show that in the sample period elasticity of substitution between capital and labor is less than 1, and in most years the direction of technical change is factor-biased.

This paper provides an empirical analysis of the interaction between capital controls and exchange rate policies in developing countries in the 1980s and 1990s. We estimate a simultaneous-equations panel mixed logit model for the joint determination of two decisions. We find strong influences from de jure exchange rate regimes on capital account policies but somewhat weaker feedback impacts. With de facto exchange rate regimes the influences in both directions are similar to each other.

The purpose of this paper is to analyze the effectiveness of capital controls and fixed exchange rates in improving economic welfare. We apply Malaysian data to our theoretical model and derive the following results for the period of our estimation. High exchange rate volatility negatively affects Malaysian net exports and real GDP. By stabilizing the exchange rate and recovering monetary policy autonomy, capital controls and fixed exchange rates can lead to lower values of loss functions. This beneficial effect is stronger, the more open the Malaysian economy.