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Countercyclical Elasticity of Substitution

Dongya Koh and Raul Santaeulalia-Llopis

No 946, Working Papers from Barcelona Graduate School of Economics

Abstract: We empirically show that the short-run elasticity of substitution between capital and labor (?t) is countercyclical. In recessions, capital and labor are more substitutable than in expansions. We explore the effects of the countercyclicality of ?t on aggregate fluctuations in the context of an otherwise standard competitive-markets business cycle model. The countercyclical ?t contributes to resolve four main labor-market puzzles: Dunlop-Tarshis phenomenon, labor-productivity puzzle, hours-productivity puzzle, and labor share puzzle.

Keywords: aggregate fluctuations; elasticity of substitution; asymmetric response; labor market puzzles (search for similar items in EconPapers)
JEL-codes: E3 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2017-01
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