Multifactor CES General Equilibrium: Models and Applications

TL;DR

This paper develops a multifactor CES general equilibrium model using linked input-output data from Japan and Korea to measure sector-specific elasticities and assess the economy-wide impact of productivity shocks.

Contribution

It introduces a method to jointly estimate sector-specific CES elasticities and applies it to real data, comparing different elasticity assumptions in general equilibrium analysis.

Findings

Estimated sector-specific CES elasticities for Japan and Korea.

Quantified welfare effects of productivity shocks in a multi-sector model.

Compared impacts under different elasticity assumptions like Leontief and Cobb-Douglas.

Abstract

Sector specific multifactor CES elasticity of substitution and the corresponding productivity growths are jointly measured by regressing the growths of factor-wise cost shares against the growths of factor prices. We use linked input-output tables for Japan and the Republic of Korea as the data source for factor price and cost shares in two temporally distant states. We then construct a multi-sectoral general equilibrium model using the system of estimated CES unit cost functions, and evaluate the economy-wide propagation of an exogenous productivity stimuli, in terms of welfare. Further, we examine the differences between models based on a priori elasticity such as Leontief and Cobb-Douglas.