Elasticity of Substitution in Post-Communist Economies
Keywords:
elasticity of substitution, European post-communist countries, panel modelAbstract
In our research we estimate the elasticity of substitution post-communist economies integrated in European Union. There are many approaches to estimate the production function coefficients as the elasticity of substitution. We argue that a frequency panel model is suitable econometric tool for our purposes. We derive the specification from the capital demand first-order condition of firm maximising its profit. Data are adapted from the World Penn Tables and World Development Indicators, World Bank. Data are modified with band-pass filter to abstract them from the business cycles and the short-term effects driven by different underlying processes. The filter creates overlapping observations, the stochastic term is serially correlated and therefore feasible generalized least squares estimator is used. Comparing the results with the relevant results in a world literature we estimate relatively low value of the elasticity of substitution in European post-communist countries. Possible explanations are discussed.
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
References
Baltagi, B. H. (2013), Econometric Analysis of Panel Data (5th edition), John Wiley and Sons, New York.
Baxter, M., King, R. G. (1999), "Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series", The Review of Economics and Statistics, Vol. 81, No. 4, pp. 575-593.
Chirinko, R. S. (2008), “σ: The long and short of it”, Journal of Macroeconomics, Vol. 30, No. 2, pp. 671-686.
Chirinko, R. S., Mallick, D. (2014), "The Substitution Elasticity, Factor Shares, Long-Run Growth, and the Low-Frequency Panel Model", Working Paper No. 4895, CESifo Group Munich, December 2015.
Feenstra, R. C., Inklaar, R., Timmer, M. P. (2015). “The Next Generation of the Penn World Table”, American Economic Review, Vol. 105, No. 10, pp. 3150-3182.
Greene, W. H. (2012), Econometric Analysis (7th edition), Pearson, New Jersey.
Jürgen, A. (2009), “A Dual Elasticity of Substitution Production Function with an Application to Cross Country Inequality”, Economics Letters, Vol. 102, No.1, pp. 10-12.
Klump, R., McAdam, P., Willman, A. (2007), “Factor Substitution and Factor Augmenting Technical Progress in the US”, The Review of Economics and Statistics, Vol. 89, No.1, pp. 183-192.
Klump, R., McAdam, P., Willman, A. (2012), “The Normalized CES Production Function: Theory and Empirics”, Journal of Economic Surveys, Vol. 26, No. 5, pp. 769-799.
León-Ledesma, M.A., McAdam, P., Willman, A. (2010). “In Dubio pro CES: Supply Estimation with Mis-Specified Technical Change”, Working Paper No. 1175, European Central Bank, April 2010.
Szomolányi, K., Lukáčiková, A., Lukáčik, M. (2017), “Long-Run Elasticity of the Substitution in the Slovak Economy”, in Proceeding of ENTRENOVA conference, 7-9 September, Dubrovnik, Croatia.
