Getting Normalization Right: Dealing with ‘Dimensional Constants’ in Macroeconomics

Cantore, C (2011) Getting Normalization Right: Dealing with ‘Dimensional Constants’ in Macroeconomics Working Paper.

Preview	Text dynarewp009.pdf Available under License : See the attached licence file. Download (363kB)
Preview	Text (licence) SRI_deposit_agreement.pdf Download (33kB)

Abstract

We contribute to a recent literature on the normalization, calibration and estimation of CES production functions. The problem arises because CES ‘share’ parameters are not in fact shares, but depend on underlying dimensions - they are ‘dimensional constants’ in other words. It follows that such parameters cannot be calibrated, nor estimated unless the choice of units is made explicit. We use an RBC model to demonstrate two equivalent solutions. The standard one expresses the production function in deviation form about some reference point, usually the steady state of the model. Our alternative, ‘re-parametrization’, expresses dimensional constants in terms of a new dimensionless (share) parameter and all remaining dimensionless ones. We show that our ‘re-parametrization’ method is equivalent and arguably more straightforward than the standard normalization in deviation form. We then examine a similar problem of dimensional constants for CES utility functions in a two-sector model and in a small open economy model; then re-parametrization is the only solution to the problem, showing that our approach is in fact more general.

Item Type:	Monograph (Working Paper)
Divisions :	Faculty of Arts and Social Sciences > School of Economics
Authors :	Name Email ORCID Cantore, C
Date :	1 June 2011
Related URLs :	Publisher
Additional Information :	Reproduced with permission of the authors.
Depositing User :	Symplectic Elements
Date Deposited :	24 May 2012 10:43
Last Modified :	31 Oct 2017 14:32
URI:	http://epubs.surrey.ac.uk/id/eprint/427916

Actions (login required)

View Item

Downloads