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2012•Macroeconomic DynamicsRequires access

CAPITAL–LABOR SUBSTITUTION, SECTOR-SPECIFIC EXTERNALITIES, AND INDETERMINACY

Nopphawan Photphisutthiphong, Mark Weder

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Abstract

This paper examines the effect of the elasticity of technological substitution on the existence of equilibrium indeterminacy in two-sector economies. Following recent empirical evidence, the elasticity of substitution between capital and labor is below unity and we find that this requires a higher degree of productive externalities in order to still be able to produce indeterminate equilibria. However, empirically realistic rates of substitution do not rule out indeterminacy.

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What this paper is about

This paper examines the effect of the elasticity of technological substitution on the existence of equilibrium indeterminacy in two-sector economies. Following recent empirical evidence, the elasticity of substitution between capital and labor is below unity and we find that this requires a higher degree of productive externalities in order to still be able to produce indeterminate equilibria. However, empirically realistic rates of substitution do not rule out indeterminacy.

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Available abstract

This paper examines the effect of the elasticity of technological substitution on the existence of equilibrium indeterminacy in two-sector economies. Following recent empirical evidence, the elasticity of substitution between capital and labor is below unity and we find that this requires a higher degree of productive externalities in order to still be able to produce indeterminate equilibria. However, empirically realistic rates of substitution do not rule out indeterminacy.

Key concepts: Economics, Elasticity of substitution, Externality, Indeterminacy (philosophy), Substitution (logic), Microeconomics, Elasticity (physics), Capital (architecture)

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