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Aggregate Elasticity of Substitution and Economic Growth: A Synthesis

Jianpo Xue () and Chong Yip

DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade

Abstract: This paper examines the relation between aggregate elasticity of substitution (AES) and capital accumulation (the AES-K relation) in a general multi-sector Solow growth model with all CES production technologies. There are two intermediate goods produced by capital and labor, while the final good is produced by combining the two intermediate goods. When capital is sector-specific, then it is found that a positive AES-K relation emerges ony if the elasticity of substitution (ES) between capital and labor is of the same sign as the ES between the inter-mediate goods, but with the latter having a larger magnitude as required by the restriction of capital-skill complementarity. We also introduce the concepts of "global" versus "local" AES-capital relation and highlight that the AES findings of the existing literature are local ones. The general conclusion of our analysis is that capital mobility is an important factor for the likelihood of a positive AES-K relation.

Keywords: Aggregate elasticity of substitution (AES); Normalized CES production function; Global and local AES-capital relations. (search for similar items in EconPapers)
JEL-codes: E23 O41 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2012-09
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Journal Article: Aggregate elasticity of substitution and economic growth: A synthesis (2013) Downloads
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