Does the aggregate production function imply anything about the laws of production? A note on the Simon and Shaikh critiques

The aggregate production function (especially the Cobb–Douglas) is widely used in both applied and theoretical work, in spite of the large number of criticisms of it that have been advanced since its inception. Two related criticisms by Simon and Levy (1963) and Shaikh (1974) are particularly damaing since they have shown that if factor shares are stableanyunderlying technology will generate a Cobb–Douglas relationship. This argument seems to have been largely ignored in the literature or, by implication, not seen as particularly important. The purpose of this paper is to assess and extend these criticisms. New empirical evidence is presented which, it is argued, illustrates the former. Furthermore, it is shown that a Kaleckian mark-up model will equally give rise to a Cobb–Douglas even though, of course, no neoclassical assumptions are invoked. It is concluded that the Cobb–Douglasper se can give no independent corroboration of either the marginal productivity theory of distribution or the assumption of perfect competition.     

How different are the production functions of the European manufacturing sectors? New empirical evidence

The neo-classical model of international trade assumes that the Total Factor Productivity (TFP) of a sector is common across countries, that returns to scale are constant and that the sectoral production of the countries differs by virtue of the factor endowments. In this article, we consider whether the differences in production can also be explained by the economies of scale in the national industries and by the technological differences across countries. To test this hypothesis, we estimate three models proposed in Harrigan (1999 Harrigan, J. 1999. Estimation of cross-country differences in industry production functions. Journal of International Economics, 47: 267–93.  [Google Scholar]) with data for eight European Union (EU) Member States covering the period 1978 to 1992 and analyse how the TFP changes from country to country.     

Assessing the role of aggregate demand and supply shocks in China’s macroeconomic fluctuation

The combination of a high growth rate and low information has been observed since the late 1990s in the Chinese economy. Should the fact be considered as a result of greatly improved supply capability or should the fact reflect the improvement in the government’s aggregate demand management? In this paper, we try to assess the role of aggregate demand and supply shocks in China’s macroeconomic fluctuation. We use a bivariate structural VAR model to investigate macroeconomic dynamics for China within the aggregate-demand and aggregate-supply framework, using the quarterly data in the period of 1996Q1–2005Q4. Our principal findings are following: (1) China’s high growth shall be associated more with greatly improved supply capability, especially after its WTO entrance. The expansionary aggregate demand policies may have limited effects to raise the growth rate in the post-1996 in China. This result suggests that we need a more pro-growth policy stance in order to maintain a high and stable growth. (2) The low inflation in that period is driven primarily by weak aggregate demand rather than supply factors.     

Firm size,credit scoring accuracy and banks’ production of soft information

Research on SME bank financing generally assumes that smaller firms are more opaque from a lender’s perspective. We propose that the discriminatory power of credit scoring models can be thought of as a proxy for firm opaqueness, given that when these models perform poorly, lenders must invest in the production of ‘soft information’ to supplement the financial data used in these models. Measuring the discriminatory power of probit default models across quintiles of the Irish SME size distribution, we show that our proxy for firm opaqueness increases monotonically as firms get smaller. This finding supports an assumption that is the starting point to a wide strand of literature on SME bank financing. Our findings can also be interpreted as providing an insight to the literature on the determinants of banks’ choice of lending technology. While smaller banks may, as found in a substantial previous literature, produce larger amounts of ‘soft information’ due to their organizational advantages, they may also do so out of necessity: hard-information-based default modelling is less effective among smaller firms, thereby forcing banks that lend to these borrowers to invest more in relationship banking technologies to retain competitiveness.     

Does aggregate uncertainty explain size and value anomalies?

This paper examines the impact of aggregate uncertainty on return dynamics of size and book-to-market ratio sorted portfolios. Using VVIX as a proxy for aggregate uncertainty, and controlling for market risk, volatility risk, correlation risk and the variance risk premium, we document significant portfolio return exposures to aggregate uncertainty. In particular, portfolios that contain small and value stocks have significant and negative uncertainty betas, whereas portfolios of large and growth stocks exhibit positive and significant uncertainty betas. Using a quasi-natural experimental setting around the financial crisis, we confirm the differential sensitivity of small versus big and value versus growth portfolios to aggregate uncertainty. We posit that due to their negative uncertainty betas, uncertainty-averse investors demand extra compensation to hold small and value stocks. Our results offer an uncertainty-based explanation to size and value anomalies.     

How important are dual economy effects for aggregate productivity?

This paper brings together development accounting techniques and the dual economy model to address the role that factor markets have in creating variation in aggregate total factor productivity (TFP). Development accounting research has shown that much of the variation in income across countries can be attributed to differences in TFP. The dual economy model suggests that aggregate productivity is depressed by having too many factors allocated to low productivity work in agriculture. Data show large differences in marginal products of similar factors within many developing countries, offering prima facie evidence of this misallocation. Using a simple two-sector decomposition of the economy, this article estimates the role of these misallocations in accounting for the cross-country income distribution. A key contribution is the ability to bring sector-specific data on human and physical capital stocks to the analysis. Variation across countries in the degree of misallocation is shown to account for 30–40% of the variation in income per capita, and up to 80% of the variation in aggregate TFP.     

Is there really a gap between aggregate productivity and technology?

The important contribution by Basu and Fernald (2002 Basu, S and Fernald, JG. 2002. Aggregate productivity and aggregate technology. European Economic Review, 46: 963–91.  [Google Scholar]) shows that, in practice, there is a statistically significant gap between aggregate productivity and technology that can be attributed to inefficient product and labour markets. This is important, as it implies that the Solow residual is an imperfect index for aggregate technology change. We take a related approach and find that when we control for capacity utilization, time varying markup and account for externalities between industries, by employing a superior system estimator, the gap between the aggregate productivity and technology is shown to narrow considerably.     

What drags and drives mobility? Explaining Canada's aggregate migration patterns

Understanding the factors that determine the migration of labour between regions is crucial for assessing the response of the economy to macroeconomic shocks and identifying policies that will encourage an efficient reallocation of labour. Using a gravity model, Poisson pseudo‐maximum likelihood specifications and Census data for 69 economic regions, this article examines the determinants of aggregate migration within Canada from 1991 to 2006. Our results suggest that migration tends to increase with differences in labour market performance. We also find that provincial borders have the strongest impact on migration involving low‐populated regions and that distance is most important across provincial borders.     

The Hicks‐Malinvaud average period of production and ‘marginal productivity’: A critical assessment

Abstract

Malinvaud took up the concept of the average period of production introduced by Hicks in Value and Capital and then Capital and Time, in an article of 2003 celebrating Wicksell's contribution to the theory of capital, where he observed that once techniques are ranked according to the average period for a given initial rate of interest, a rise in the rate of interest entails the use of a technique with a shorter average period. After a brief reconstruction of Malinvaud's argument, it is shown that the result is far less encouraging for neoclassical theory than it might seem. The most important problem is not the fact that change in the interest rate affects the average period of production associated with a technique, despite the concern this aroused in Hicks and Malinvaud, but rather that it affects the ranking of techniques. An example with two techniques is used to show that a rise in the rate of interest entails the use of a technique with a shorter average period even in the case of reswitching simply because the ranking of techniques is inverted at the two switch points.     

Do market prices aggregate information about macroeconomic uncertainty (or risk)?

This article examines several economic variables that represent either confidence in future economic conditions or the degree of risk/uncertainty about future conditions in order to determine which contain more information about future employment and output. Some of these variables are prices, while others are from surveys. Causality tests, historical decompositions within a VAR and out-of-sample forecasts are among the tools used. This article concludes that monthly stock returns contain much more information about future economic conditions than the other variables. The spread between Moody’s BAA and AAA bonds, the spread between the constant maturity 10-year government bond and the federal funds rate, as well as uncertainty in future economic conditions as measured by the Federal Reserve Bank of Philadelphia’s Business Outlook Survey also provide information about future economic conditions. Notably, this article finds that monthly stock returns contain more information about future economic conditions than does the vix and that variables based on market prices provide more information than survey data. This result provides some support for the notion that market prices aggregate information.     

Is there a Laffer curve between aggregate output and public sector employment?

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is “small” and negative, when it is “large”. Using the annual data from 22 OECD countries over the period 1960–1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output. First version received: October 1996/Final version received: April 2000     

Can religion insure against aggregate shocks to happiness? The case of transition countries

This paper examines the effects of reforms and religion on happiness in transition economies. Earlier literature suggests that religiosity insures happiness against various individual stressful life events. This phenomenon is well-explored in developed countries but rarely studied in post-communist countries, where religion was officially suppressed for a long period. These countries have undergone considerable economic transformations over the past two decades. Using cross-sectional Life in Transition Survey data and historical data on religions, I examine if religion insures against economic reforms. The endogeneity of religion is taken into account. The findings suggest that economic reforms may have both positive and negative effects on happiness. Religiosity indeed insures happiness and perceptions of economic and political situations against economic reforms.     

Macroeconomic policy and aggregate fluctuations in a semi-industrialized open economy: Greece 1951–1980

In this paper we model the effects of macroeconomic policy in a semi-industrialized open economy. Greece is our case, but the model could apply to other similar economies with tightly controlled financial markets and comprehensive foreign exchange restrictions, where both the exchange rate and interest rates are administered prices. The model consists of three equations which determine output, the price level and the trade balance. It is largely non-Keynesian, but, through the real exchange rate, it allows for anticipated monetary policy to affect real output. The model is estimated by FIML and its various restrictions cannot be rejected. A policy simulation suggests that even Friedman's x% money growth rule would ensure greater macroeconomic stability in the 1970s than the monetary policy that was actually followed.     

Do Aussie markets smile? Implied volatility functions and determinants

If options are correctly priced, the interpretation of volatility in the Black–Scholes model (as identifying the volatility of the underlying asset) is violated. The empirical relation between the model ‘implied volatility’ and the degree to which the option is in-the-money (moneyness) has been reported as resembling a U-shape (or ‘smile’) for options on currencies (and more of a ‘smirk’ for options on equities). In this article, using multivariate time-series analysis and employing an impulse response function, we investigate the structural relationships and dynamics of the volatility smile in relation to the option liquidity, key features of the underlying asset and market momentum. Our findings confirm evidence of a number of biases in the Black–Scholes model consistent with Chou et al. (2011) in regard to liquidity in both the underlying and the option itself, and with Peña et al. (1999) as to the importance of the option time to maturity. As well as delineating such biases as they co-relate both with each other and with the underlying asset volatility and momentum, we find that the pronounced smile is related to the differential sensitivities of in-the-money and out-of-the-money options, which itself suggests an explanation for the characteristic smile shape.     

The transformation of China＇s economic and government functions

The content of China＇s economic transformation is not single, and this article argues that it includes three parts. The first is the reform of economic system, the second is the change in the pattern of economic growth, and the third is the adjustment of economic structure. Government is the leading force of China＇s economic transformation, and repeated reform of government institutions has brought about some changes to government functions. But problems are obvious that lag changes of government functions have become an obstacle in China＇s economic transformation. This article describes the historical evolution and the reality of China＇s economic transformation, and analyzes the main reasons of lag changes in government functions, and reveals that the transformation of government functions is the key for successful transformation of China＇s economy.     

Are estimates of labour demand functions mere statistical artefacts?

This paper considers the estimation of putative neoclassical aggregate labour demand functions using constant price value data. Regression results normally find that employment is negatively related to the real wage and that the constant‐output elasticity of employment with respect to the real wage is about ?0.3. This is taken as evidence that unemployment is the result of the real wage being too high, ceteris paribus. This paper shows that these estimates are purely the result of an underlying identity and cannot be interpreted as implying any causal relationship and, as such, they have no policy implications.     

The relationship among money supply, banking lending and aggregate demand in China: 1994–2006

Based on the framework of Bernanke & Blinader (1988) and Walsh (2003), this paper provides a concise analysis for relationship among money supply, banking lending and aggregate demand; and makes an empirical test on relationship among China’s money supply, banking lending and aggregate demand from 1994 to 2006 by adopting the single-equation regressive model and vector autoregressive model in terms of Keynesian structural model and monetarism simplified model. The result shows that money supply and banking lending have both played a driving role on real economy. Because of non-market interest rates, Keynesian structural model cannot explain the transmission mechanism of China monetary policies better than monetarism simplified model. __________ Translated from Jingji kexue 经济科学 (Economic Science), 2008, (1): 5–15     

北方干旱“硬伤’’

“十年九早”，干旱似乎已是我国北方大地冬春季节的常态。切实地走在田间库边，记者才深切的感受到去冬今春的干旱度。眼前的景象早已不是往昔的“北国风光，千里冰封，万里雪飘”，而是皲裂的土地，干涸的水渠，枯黄的麦苗……持续的干旱，将可能终止我国连续七年丰收的好景，更会给北方这片我国冬粮的主产区带来大面积的歉收。     

An experimental analysis of team production in networks

Experimental and empirical evidence highlights the role of networks on social outcomes. This paper tests the properties of exogenously fixed networks in team production. Subjects make the same decisions in a team work environment under four different organizational networks: the line, the circle, the star, and the complete network. In all the networks, links make information available to neighbors. This design allows us to analyze decisions across networks and a variety of subject types in a standard linear team production game. Contribution levels differ significantly across networks and the star is the most efficient incomplete network. Moreover, our results suggest that subjects act as conditional cooperators with respect to the information received from the network.