The stability of the production function and the marginal productivity of inputs: An empirical study

This paper tests for the stability of the aggregate production function of the United States from 1929 to 67 with two inputs (labor and capital) and with three inputs (labor, capital, and real balances). The results show parametric instability regardless of the inclusion of real balances. Using the varying parameters estimation method allowing for permanent and transitory shifts in the parameters, time-series estimates of the marginal productivity of capital, labor, and real balances are derived for the period 1929–1967. The temporal behavior of the marginal productivity of real balances is briefly analyzed.