| Abstract: | The paper uses a neoclassical production function and historical data to test for structural stability in Australian manufacturing industry. The production function is an extended constant elasticity of substitution form in which factor substitution elasticity, returns to scale and market structure in output, capital and labour are testable hypotheses. Tests for structural changes in homogeneity and factor substitution elasticity relations are based on overall and individual tests of covariance analysis and also on a special version of the Swerling-Kalman filtering systems as proposed by Cooley and Prescott. The empirical findings possess desirable statistical properties and indicate the existence of structural instability in the industry. The evidence also repudiates the assumptions of unitary factor substitution elasticity, constant returns to scale and market competitiveness in output and factors of production. |
