Uncertainty and capacity constraints: Reconsidering the aggregate production function

Eduard Gracia

Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), 2011, vol. 5, No 2011-19, 50 pages

Abstract: The CobbDouglas function is today one of the most widely adopted assumptions in economic modeling, yet both its theoretical and empirical bases have long been under question. This paper builds an alternative function on very different (albeit also neoclassical) microfoundations aimed at both addressing those theoretical drawbacks and providing a better empirical fit than the CobbDouglas formula. The new model, unlike the CobbDouglas function, does not portray installed capacity as aggregate capital but as a sunk cost generating economic rents. An analysis of 1949-2008 annual U.S. growth data suggest this alternative model explains nearly 85 percent of GDP fluctuations and is empirically more robust than the CobbDouglas, whilst both contemporary and lagged aggregate capital are statistically rejected as explanatory variables. This lends support to the old Cambridge Critique”, according to which using value-weighted capital aggregates to explain production simply makes no sense. At face value, these results not only pose a question on any macroeconomic model assuming a CobbDouglas function but also point towards an alternative interpretation of phenomena such as the way monetary policy impacts productivity.

Keywords: production function; CobbDouglas; capital controversy (search for similar items in EconPapers)
JEL-codes: E22 E23 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.5018/economics-ejournal.ja.2011-19
https://www.econstor.eu/bitstream/10419/52688/1/679412980.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifweej:201119

DOI: 10.5018/economics-ejournal.ja.2011-19

Access Statistics for this article

Economics - The Open-Access, Open-Assessment E-Journal (2007-2020) is currently edited by Dennis J. Snower

More articles in Economics - The Open-Access, Open-Assessment E-Journal (2007-2020) from Kiel Institute for the World Economy (IfW Kiel) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().