Medium run redux - technical change, factor shares and frictions in the euro area

Peter McAdam () and Alpo Willman ()
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Peter McAdam: Corresponding author: Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html
Alpo Willman: Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 915, Working Paper Series from European Central Bank

Abstract: We develop a framework for analyzing “medium-run” departures from balanced growth, and apply it to the economies of continental Europe. A time-varying factor-augmenting production function (mimicking “directed” technical change) with a below-unitary substitution elasticity coupled with supporting short-run factor demands (and price setting) is shown to account for the observed dynamics of factor incomes shares, capital deepening and the capital-output ratio. Based on careful data accounting, we also identify a rising mark-up, which we ascribe to the rise of Services. The balanced growth path emerges as a special (and testable) case of our framework, as do existing strands of medium-run debates. JEL Classification: C22, E23, E25, O30, O51.

Keywords: Medium Run; Euro Area; Elasticity of Substitution; Factor-Augmenting Technical Progress; Productivity; Income Distribution; Adjustment Costs; Effective Labor Hours. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-eec and nep-eff
Date: Written 2008-06

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