Medium run redux: technical change, factor shares and frictions in the euro area

Peter McAdam () and Alpo Willman

No 915, Working Paper Series from European Central Bank

Abstract: We develop a framework for analyzing "medium-run" departures from balanced growth, and apply it to the economies of continental Europe. A time-varying factor-augmenting production function (mimicking "directed" technical change) with a below-unitary substitution elasticity coupled with supporting short-run factor demands (and price setting) is shown to account for the observed dynamics of factor incomes shares, capital deepening and the capital-output ratio. Based on careful data accounting, we also identify a rising mark-up, which we ascribe to the rise of Services. The balanced growth path emerges as a special (and testable) case of our framework, as do existing strands of medium-run debates. JEL Classification: C22, E23, E25, O30, O51

Keywords: adjustment costs; Effective Labor Hours.; Elasticity of Substitution; euro area; Factor-Augmenting Technical Progress; income distribution; Medium Run; productivity (search for similar items in EconPapers)
Date: 2008-06
Note: 50336
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2008915

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