Capital-Labor Substitution and Equilibrium Indeterminacy

Jang-Ting Guo and Kevin Lansing

No 2008-06, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Empirical evidence indicates that the elasticity of capital-labor substitution for the aggregate U.S. economy is below unity. In contrast, the existing indeterminacy literature has mostly restricted attention to a Cobb-Douglas production function which imposes a substitution elasticity exactly equal to unity. This paper examines the quantitative relationship between capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector growth model. With variable capital utilization, the substitution elasticity has little quantitative impact on the minimum degree of increasing returns needed for indeterminacy. However, when capital utilization is constant, a below-unity substitution elasticity sharply raises the minimum degree of increasing returns. In this version of the model, lower substitution elasticities impose a higher adjustment cost on labor hours that cannot be mitigated by shifts in the capital utilization rate. Overall, our results show that empirically-plausible departures from the Cobb-Douglas specification can make indeterminacy more difficult to achieve.

Keywords: Capital; Labor supply (search for similar items in EconPapers)
JEL-codes: E30 E32 (search for similar items in EconPapers)
Pages: 18
Date: 2009-06-01
New Economics Papers: this item is included in nep-dge and nep-mac
Note: PDF date: June 24, 2009.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.frbsf.org/wp-content/uploads/wp08-06bk.pdf PDF - view (application/pdf)
https://www.frbsf.org/research-and-insights/public ... brium-indeterminacy/ FRBSF - view (text/html)
https://fraser.stlouisfed.org/title/working-papers ... indeterminacy-639273 FRASER - view (text/html)

Related works:
Journal Article: Capital-labor substitution and equilibrium indeterminacy (2009)
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:fip:fedfwp:2008-06

Ordering information: This working paper can be ordered from

DOI: 10.24148/wp2008-06

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().