Poole in the New Keynesian model

We study the properties of alternative central bank targeting procedures within the standard New Keynesian model. We find that Poole's famous insights concerning the output stabilization properties of money and interest rate targeting obtain when intertemporal substitution is low. And that output volatility rankings do not induce similar welfare rankings. Unlike the popular presumption, money targeting always fares better for money demand shocks. For fiscal shocks, money targeting does better for low and worse for high degree of intertemporal substitution. The opposite pattern obtains for supply shocks.     

Income and wealth distribution in a simple model of growth

Summary. This paper studies a deterministic one-sector growth model with a constant returns to scale production function and endogenous labor supply. It is shown that the distribution of capital among the agents has an effect on the level of per-capita output. There exists a continuum of stationary equilibria with different levels of per-capita output. If the elasticity of intertemporal substitution is large, a higher output level can be achieved when income inequality is great, that is, when the income distribution is strongly dispersed. If the elasticity of intertemporal substitution is low, the reverse relation holds. The paper shows that countries with identical production technologies and identical preferences may have different GDP levels because wealth is distributed differently among their inhabitants. Received: January 29, 1999; revised version: October 4, 1999     

Dynamic factor demands under imperfect competition: the Greek manufucturing industry 1958–1981

The intertemporal maximization problem of the firm under adjustment costs for its factors of production and imperfect competition in the output market is considered. The first-order conditions, with respect to capital and labour, the production function and the demand equation have been jointly estimated using Greek manufacturing data and values for the structural parameters have been obtained. The estimates are plausible and most of them significant. Tests of the overidentifying restirctions are unable to reject the overall specification of the model at conventional levels of significance.     

A MACROECONOMIC PERSPECTIVE ON SKILL SHORTAGES AND THE SKILL PREMIUM IN NEW ZEALAND*

Qualification and occupation‐based measures of skilled labour are constructed to explain the skill premium – the wage of skilled labour relative to unskilled labour in New Zealand. The data exhibit a more rapid growth in the supply of skilled labour than the skill premium, and a very large increase in the real minimum wage over the period from 1986 to 2005. We estimate the rate of increase in the relative demand for skills and the elasticity of substitution. The data are consistent with skill shortages and a skill‐bias technical change. We examine the effects of the minimum wage, capital complementarity, and the exchange rate on the skill premium. We also test whether the demand for skills and the elasticity of substitution varied across industries and over time.     

Dynamic factor models of consumption,hours and income

This paper addresses two questions in the economics of intertemporal choice. First, what are the key factors that drive fluctuations in income and what are the time paths of their effects? Second, how do consumers respond to these factors? We answer these questions by estimating dynamic factor models of consumption, hours, wages, unemployment, and income that account for measurement error and the fact that variables used in the study are measured at different time intervals and/or are aggregates for the calendar year. We pay special attention to a dynamic factor representation of a joint life cycle model of consumption and labour supply, which permits us to quantify the effect of wages, unemployment, and other factors on the marginal utility of income as well as to estimate the substitution effects of wage changes on labour supply and consumption.     

Towards a more general approach to testing the time additivity hypothesis

A new procedure is proposed for re-examining the assumption of additivity of preferences over time which, although untenable, is usually maintained in intertemporal analyses of consumption and labour supply. The method is an extension of a famous work by Browning. However, it is more general in permitting the estimation of intertemporal demand systems, which are explicit in an unobservable variable (price of utility), but may lack a closed form representation in terms of observable variables such as prices and total outlay. It also makes extensive use of duality theory to solve the endogeneity problem encountered in Browning's study. Applying this method with an appropriate estimator to the Australian aggregate data, it is found that the time additivity hypothesis is decisively rejected, which is consistent with Browning's conclusion.     

The role of labour demand elasticities in tax incidence analysis with heterogeneous labour

Whether labour bears full burden of household level income and consumption taxes ultimately depends on the degree of substitutability among different types of labour in production. We find more variation in incidence patterns across households with less than perfectly substitutable heterogeneous labour than with perfectly substitutable homogeneous labour in production. This finding is based on results obtained from homogeneous and heterogeneous labour general equilibrium tax models calibrated to decile level income and consumption distribution data of UK households for the year 1994. We use labour supply elasticities implied by the substitution elasticity in households' utility functions and derive labour demand elasticities from the substitution elasticity in the production function. First version received: March 1998/Final version received: April 1999     

Policy reform and labour demand in branches of Sri Lankan manufacturing industry

Many policy reforms in developing countries aim to remove factor market distortions. Whether such reforms reduce unemployment depends partly on the substitution possibilities between labour and other factors of production. This paper examines labour demand in seven branches of Sri Lankan manufacturing industry, using data on 4-digit industrial categories over the 1990 to 1997 period. The Box–Cox transformation is used to allow for flexible, and data-dependent, elasticities. The elasticity of capital–labour substitution varies widely across the branches of industry and is usually variable rather than constant. The average, long-run own-wage elasticity of labour demand for the manufacturing sector is estimated as ?0.80, so factor price policy should have an important effect on labour demand in this setting.     

Intertemporal capital substitution and Hayekian booms

Hayek’s business cycle theory portrays monetary expansion and monetary contraction with counterintuitive asymmetry. On the one hand, it suggests that they both change relative prices and cause costly reallocations of production factors. At the same time, the theory predicts that while a monetary contraction causes the economic crisis, the monetary expansion comes with the boom. I argue that what I call intertemporal capital substitution in industries close to final consumption explains why there is a boom in spite of the costly reallocations. More specifically, monetary expansion only gradually increases the demand for nonspecific factors of production by industries that are temporally remote from final consumption. Responding to the expected higher cost of nonspecific factors, consumer-goods industries temporarily increase output and depreciate specific durable production factors faster than they planned.     

Microeconomic uncertainty and macroeconomic indeterminacy

We propose a stylized intertemporal macroeconomic model wherein the combination of decentralized trading and microeconomic uncertainty (taking the form of privately observed and uninsured idiosyncratic shocks) creates an information problem between agents and generates indeterminacy of the macroeconomic equilibrium. For a given value of the economic fundamentals, the economy admits a continuum of equilibria that can be indexed by the sales expectations of firms at the time of investment. The Walrasian equilibrium is one of these possible equilibria but it is reached only if firms are optimistic enough. With a weaker degree of optimism, equilibrium output, employment and real wages will be lower than in the Walrasian equilibrium. Moreover, the range of possible equilibria will depend positively on the wage elasticity of the labour supply and on the magnitude of the information problem between buyers and sellers (in our case, the variance of the idiosyncratic shocks).Stochastic simulations performed on a calibrated version of the model show that pure demand expectation shocks may generate business cycle statistics that are not inconsistent with the observed ones.     

Commodity Rates of Interest and Intertemporal Substitution in Commodity Demand and Consumption

This paper examines the role of commodity own rates of interest in intertemporal analysis of consumer behaviour and presents a disaggregate analysis of intertemporal substitution in commodity demand and consumption. Commodity rates of interest are defined from the Euler equations implied by the intertemporal consumer choice problem. The relationship between commodity own rates and the real interest rate is derived, and the conditions for equality of commodity own rates are discussed. The intertemporal commodity substitution elasticities are characterised using commodity rates of interest, and the intertemporal substitution elasticity of consumption is derived from its constituent commodity demands. Evidence from estimation of the demand system and the consumption function reveals high intertemporal substitution for consumer goods as well as consumption.     

Outsourcing, Imports and Labour Demand

This paper examines the effects of purchased services and imported intermediate materials on the labour demand for different skills in German manufacturing sectors. We derive and estimate a factor demand system based on the generalised Box–Cox cost function nesting both the normalised quadratic and the translog functional form. We find that the impacts of output and capital growth are more important in explaining the demand for heterogeneous labour than substitution effects between labour and non–labour inputs. Similarly, the increasing use of both imported materials and purchased services is a consequence of output growth rather than input substitution.
JEL classification : J 23; O 33     

Input substitution,economies of scale and productivity growth in the US upholstered furniture industry

Cost, factor demand and productivity growth are considered in the upholstered furniture industry over 1958–87. Factors are divided into labour, capital and materials. It is found that all inputs are substitutes in production although substitution elasticities are small. Factor demand is price-inelastic for all inputs. The industry operates around minimum average cost. Productivity growth is small but significant. The results indicate that labour will continue to be important in the industry. However, regional comparative advantage is not related to labour alone; the results suggest that policies to attract or retain the industry must consider the low degree of factor substitution.     

Indeterminacy and multiple steady states with sector-specific externalities

This paper studies a two-sector model with aggregate and sector-specific external effects in production and inelastic labor supply. We first characterize the existence, uniqueness and multiplicity of the steady states as well as their welfare properties. We particularly focus on the CES production functions and show that the steady state is generically either unique or there are exactly two. A simple geometrical methodology enables us to characterize the local dynamics of the steady state. We show that in order to get indeterminacy, the presence of both aggregate and sector-specific external effects is needed, along with low capital–labor elasticities of substitution and high, but bounded from above, elasticities in intertemporal consumption. We perform a sensitivity analysis and show that indeterminacy emerges for parameter values in line with those used in calibrations of standard RBC models, that is for unitary elasticities of input substitution and of intertemporal substitution in consumption.     

Joint Allocation of Leisure and Consumption Commodities: A Japanese Extended Consumer Demand System 1979—90

In this study we estimate the parameters of a household expenditure function which includes joint choice of leisure and consumption commodities in scope without a separability assumption. We have used Japanese prices, wage rate, labour supply, and expenditure data on ten commodity groups, collected from 47 cities over 12 years. This data set has the advantage that separate observations are available for each data point for all the variables. We employed the AI demand system, for estimation. Controlling for time-specific effects, the result implied a definite rejection of the weak separability of labour supply and commodity choice, and non-rejection of the homogeneity and symmetry restrictions on the demand system. All the own-price elasticities are significantly negative, and both substitutes and complements are observed across commodity groups. As for the negativity, all but one of the eigenvalues of the substitution matrix are negative. The result as a whole showed consistency with demand theory. The estimated compensated labour supply elasticity is 0.39, which is in reasonable agreement with the previous studies.     

Product cycles, endogenous skill acquisition, and wage inequality

Abstract .  This paper presents an endogenous product cycle overlapping generations model, where the supply of skilled labour is endogenously determined. This is used to examine how production shifts through imitation by developing countries affect the domestic wage differential and supply of skilled labour in developed countries. In the model, production shifts increase the demand for researchers in developed countries and cause higher relative wages for skilled labour: this leads to more individuals acquiring the skills. As a consequence, the model helps to explain the simultaneous increase in the domestic wage gap and in the supply of skilled labour observed in developed countries.     

Planning capital-labor substitution and intertemporal equilibrium with a non-linear multi-sector growth model

A non-linear multi-sector model, postulating sectoral production functions and price-responsive demand functions linked around an input-output matrix in a general equilibrium framework, is used to simulate capital-labor substitution on a growth path characterized by intertemporal equilibrium. It demonstrates how the ‘temporary equilibrium’ or ‘sequential temporary equilibrium’ form of models that allow substitution can be extended into an intertemporally indecomposable equilibrium model without abandoning interaction between prices and quantities in the determination of technology and demand. The model is applied to the analysis of the impact of changes in real-wage growth on the characteristics of the equilibrium growth path of the Turkish economy with special attention given to the employment problem.     

The Slutsky matrix and homogeneity in intertemporal consumer theory

A dual vista of an intertemporal model of the consumer yields insights into its fundamental qualitative structure that previous research was heretofore unable to uncover. For example, the intertemporal Slutsky matrix and its properties of symmetry and negative semidefiniteness apply to the integral of the discounted open-loop demand and supply functions, not to the instantaneous open-loop demand and supply functions. The results are established in a general dynamic model of the consumer which accounts for durable and nondurable goods, installation costs for the durable goods, and a leisure/labor choice.     

The intertemporal substitution effect of government purchases on the interest rate: Empirical estimates for the Netherlands

In an intertemporal equilibrium setting, temporary government purchases may affect the real interest rate. A temporary change in the level of government spending does not affect the optimal intertemporal allocation of rational consumers, who will therefore try to maintain their consumption plans. Assuming no change in the supply of goods, there is an excess demand for goods and in a closed economy the real interest rate has to rise to maintain equilibrium at the goods market. In this paper it is examined whether predictions of intertemporal substitution models hold up to the experience of the Netherlands. We extend Barro's empirical work in three ways. First, we construct a new measure of temporary government outlays. Second, we take the time series behaviour of the data concerned into account and employ a less restrictive specification for the equation to be estimated. Third, we examine the intertemporal substitution effect of government purchases onreal interest rates. Our results provide only mixed support for the hypothesis that temporary government purchases raise real interest rates. It turns out that only temporary military outlays affect the nominal and real interest rate.     

Substitution,Income, and Intertemporal Effects In Currency-Substitution Models*

Empirical studies which aim to determine the extent of international currency substitution typically focus on the coefficient associated with the anticipated rate of depreciation of the domestic currency or on the foreign interest rate in the domestic money demand equation. an intertemporal optimizing model is used to obtain a money demand function which shows that the anticipated exchange-rate change and the foreign interest rate capture an income effect and an intertemporal income or substitution effect. Using these theoretical results, the findings from empirical studies are examined to show circumstances in which international currency substitutability may have been overstated or understated.