The Normalized CES Production Function: Theory and Empirics

31 Pages Posted: 4 Oct 2012

See all articles by Rainer Klump

Rainer Klump

University of Frankfurt - Economics and Business Administration Area

Peter McAdam

European Central Bank (ECB)

Alpo Willman

University of Kent - Canterbury Campus

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Date Written: December 2012

Abstract

The elasticity of substitution between capital and labor and, in turn, the direction of technical change are critical parameters in many fields of economics. Until recently, though, the application of production functions with specifically non‐unitary substitution elasticities (i.e., non‐Cobb–Douglas) was hampered by empirical and theoretical uncertainties. As recently revealed, ‘normalization’ of production‐technology systems holds out the promise of resolving many of those uncertainties. We survey and assess the intrinsic links between production (as conceptualized in a production function), factor substitution (as made most explicit in Constant Elasticity of Substitution functions) and normalization (defined by the fixing of baseline values for relevant variables). First, we recall how the normalized Constant Elasticity of Substitution function came into existence and what normalization implies for its formal properties. Then we deal with the key role of normalization in recent advances in the theory of business cycles and of economic growth. Next, we discuss the benefits normalization brings for empirical estimation and empirical growth research. Finally, we identify promising areas of future research.

Keywords: Constant Elasticity of Substitution Production Function, Estimation, Factor‐Augmenting Technical Change, Growth Theory, Identification, Normalization

Suggested Citation

Klump, Rainer and McAdam, Peter and Willman, Alpo, The Normalized CES Production Function: Theory and Empirics (December 2012). Journal of Economic Surveys, Vol. 26, Issue 5, pp. 769-799, 2012, Available at SSRN: https://ssrn.com/abstract=2156769 or http://dx.doi.org/10.1111/j.1467-6419.2012.00730.x

Rainer Klump (Contact Author)

University of Frankfurt - Economics and Business Administration Area ( email )

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D-60325 Frankfurt am Main
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Peter McAdam

European Central Bank (ECB) ( email )

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D-60311 Frankfurt am Main
Germany
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0044 69 1344 6000 (Fax)

Alpo Willman

University of Kent - Canterbury Campus ( email )

Finland

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