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Title:
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| Number: | 07-07 |
| Author: | Kaz Miyagiwa and Chris Papageorgiou |
| Issue Date: | March 2007 |
| Abstract: | In the literature studying aggregate economies the aggregate
elasticity of substitution (AES) between capital and labor is often
treated as a constant or “deep” parameter. This view contrasts with the
conjecture put forward by Arrow et al. (1961) that AES evolves over
time and changes with the process of economic development. This paper
evaluates this conjecture in a simple dynamic multi-sector growth model, in which AES is endogenously determined. Our findings support the conjecture, and in particular demonstrate that AES tends to be positively related to the state of economic development, a result consistent with recent empirical findings. |
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