Reference : Unwrapping some euro area growth puzzles: Factor substitution, productivity and unemp...
Scientific journals : Article
Business & economic sciences : Multidisciplinary, general & others
Unwrapping some euro area growth puzzles: Factor substitution, productivity and unemployment
Klump, Rainer mailto [University of Luxembourg > Rectorate > Rectorate]
McAdam, Peter [European Cent Bank, DG Res, Frankfurt, Germany.]
Willman, Alpo [Univ Frankfurt, Frankfurt, Germany.]
Louisiana State Univ Pr
Yes (verified by ORBilu)
Baton Rouge
[en] CES production function ; elasticity of substitution ; factor-augmenting technical progress ; IT revolution ; Okun's law ; US ; euro area
[en] In this paper, we estimate a long run supply-side system incorporating a CES production function with time-varying factor-augmenting technical progress for the euro area over the period 1970-2005. We find that the elasticity of substitution lies below unity at 0.7, that labor-augmenting technical progress is dominant in the long run while capital-augmenting technical progress plays an important role in the interim period. Importantly, we also find evidence of a structural break in the pattern of biased technical progress towards the end of the 1990s. Our results help to solve two puzzles in Europe's recent growth experience which differ markedly from the US experience. The first is related to the effects of the IT boom in the 1990s on productivity growth in Europe. The second puzzle concerns the changes in the "Okun's law" relationship, linking growth to the reduction of unemployment, which are observable in Europe since the late 1990s. (C) 2007 Published by Elsevier Inc.

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