Alpo Willman

Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach

Using a normalized CES function with factor-augmenting technical progress, we estimate a supply-side system of the U.S. economy from 1953 to 1998. Avoiding potential estimation biases that may have occurred in earlier studies and putting a high emphasis on data consistency, we obtain robust results not only for the aggregate elasticity of substitution but also for the parameters of labor and capital augmenting technical change. We find that the elasticity of substitution is significantly below unity and that technical progress shows an asymmetrical pattern where the growth of labor-augmenting technical progress is exponential, while that of capital is hyperbolic or logarithmic.

Medium Run Redux

We develop a framework for measuring and analyzing medium-run departures from balanced growth, and apply it to developments in the euro area. A time-varying factor-augmenting production function (mimicking directed technical change) with below-unitary substitution elasticity is shown to account for the observed dynamics of factor incomes shares, TFP growth, and its components. Based on careful data accounting, we also identify a rising markup and the importance of financial-market regulations in the 1970s. The balanced growth path emerges as a special (and testable) case of our framework, as do existing strands of medium-run debates.

The BOF5 macroeconomic model of Finland, structure and dynamic microfoundations

Abstract This report is the basic documentation of the present (fifth) version of the Bank of Finland macroeconomic model, BOF5, built for policy simulation and forecasting. In constructing the model, consistent treatment of expectations is emphasised. Following current theoretical literature, intertemporal optimisation with rational expectations is taken as the starting point, and Euler equations are applied in the estimation of the key behavioural equations. Consistent treatment of technology on the supply side has been another important aim. We illustrate the properties of the model with some simulation experiments. An outline of the derivation of the key equations is presented. We also show how forward-looking equations have been transformed to facilitate the simulation under alternative assumptions concerning the formation of expectations.

Production, supply and factor shares: an application to estimating German long-run supply

Abstract This paper proposes a new framework for long-run supply estimation. We present a multi-sector model of imperfect competition with an otherwise common technology but sector-specific mark-ups, technical level and technical progress. The model accommodates many important (but often neglected) issues related to supply estimation—such as possible non-stationarity in the profit margin and factor-income share. It has been applied to Germany from the 1980s, accounting for the following notable characteristics: break and catch up process of unification, the relatively large decline in factor shares and a noticeable change in profit margins and sectoral output shares. Our approach provides a flexible way to estimate aggregate supply in the presence of changing factor and sectoral shares.

Arrow–Calvo Price Staggering

We merge Arrow and Calvo pricing themes leading to a price-resetting signal dependent on inflation and competitiveness. This allows us to tractably analyse state-dependent issues and to develop a New Keynesian Phillips curve (NKPC) expressed for the levels of variables and a specification which is not regime dependent. The standard NKPC arises as a special case. Using non-linear simulation and estimation techniques, we then demonstrate the importance of regime dependence in inflation dynamics and show that standard NKPCs are mis-specified even in low-inflation regimes. We further detect strong intrinsic persistence in historical US inflation.

Chapter 15 Aggregation, the Skill Premium, and the Two-Level Production Function

We examine the two-level nested Constant Elasticity of Substitution production function where both capital and labor are disaggregated in two classes. We propose a normalized system estimation method to retrieve estimates of the inter- and intra-class elasticities of substitution and factor augmenting technical progress coefficients. The system is estimated for US data for the 1963-2006 period. Our findings reveal that skilled and unskilled labor classes are gross substitutes, capital structures and equipment are gross complements, and aggregate capital and aggregate labor are gross complements with an elasticity of substitution close to 0.5. We discuss the implications of our findings and methodology for the analysis of the causes of the increase in the skill premium and, by implication, inequality in a growing economy.