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ELASTICITY OF SUBSTITUTION AND TECHNICAL PROGRESS: IS THERE A MISSPECIFICATION PROBLEM?

Published online by Cambridge University Press:  15 August 2016

Daniela Federici  and
Enrico Saltari
Daniela Federici
Affiliation:
University of Cassino and Southern Lazio
Enrico Saltari*
Affiliation:
Sapienza University of Rome
*
Address correspondence to: Enrico Saltari, Dipartimento di Economia e Diritto, Sapienza Università di Roma, via del Castro Laurenziano 9, 00161 Rome, Italy; e-mail: enrico.saltari@uniroma1.it.
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Abstract

In previous work, we estimated a dynamic model of the Italian economy, showing that its weakness in the past two decades is mainly due to the slowdown in total factor productivity growth. In those models, two parameters play a key role: technological progress and the elasticity of substitution. Recent estimates of those parameters are affected, in our opinion, by a specification problem: technological parameters are inherently long-run but their estimates are based on short-run data. Looking deeply into the estimation procedure, we show that the misspecification issue present in the estimates gives rise to a spurious regression bias (high R2, low DW), because the standard approach does not incorporate frictions and rigidities. Our modeling strategy takes account of them. Although we cannot in general say that our framework gets rid of the serial correlation problem, the statistics for our model do show that residuals are not serially correlated.

Keywords

CES Production FunctionElasticity of SubstitutionIncome DistributionFactor-Augmenting Technical ProgressICT Technical Change
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 1: Current Macroeconomic Challenges , January 2018 , pp. 101 - 121
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

We would like to thank Robert Chirinko, Giuseppe De Arcangelis, Kieran Donaghy, Giancarlo Gandolfo, Olivier de La Grandville and Clifford Wymer, and the participants to the workshop “Current Macroeconomic Challenges”, held in Rome, Sapienza University, March 7–8, 2014, as well as two anonymous referees for their useful comments and suggestions. The usual disclaimer applies.

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