Morishima Elasticities Of Substitution Research Articles

Interfuel Substitution and Inflation Dynamics in India

Abstract This paper uses neoclassical microeconomic theory to investigate the demand for energy and interfuel substitution in India at the sectoral level. It makes full use of the relevant economic theory and econometrics and generates inference in terms of Allen and Morishima elasticities of substitution that are internally consistent with the data and nonlinear models used. The results indicate that the interfuel substitution elasticities are consistently below unity in the household and power sectors, revealing the limited ability to substitute between major energy commodities in these two sectors. However, significant substitution relationships are found in the industrial and transportation sectors, suggesting that energy price changes in these sectors will significantly shift the demand for energy and consumption. Based on measured elasticities of substitution, we also discuss implications of energy price shocks on inflation and inflation targeting strategies by the central bank.

Assessing the costs of GHG emissions of multi-product agricultural systems in Vietnam

Besides a vital sector of the economy, agriculture is a primary source of greenhouse gas (GHG) emissions. The present paper investigates the impact of carbon tax policy on Vietnamese agriculture by focusing on multi-product systems such as rice, livestock, and aquaculture, traditionally called the Vuon (Garden)–Ao (Pond)–Chuong (livestock pen) system (VAC). In it, farmers use garden, pond, and pen by-products as fertilizer and feed. We use shadow prices and Morishima substitution elasticities as greenhouse gas emissions indicators, estimated with directional output distance function. Farmers in the Mekong Delta region are found to be technologically less efficient than in other regions of Vietnam, though the shadow prices of GHG emissions are lower there too. This indicates that farmers in the Mekong Delta, generally concentrating either on livestock or aquaculture, have greater potential for reducing GHG emissions by way of improvements in technical efficiency than do those in other regions. However, Morishima elasticity estimates show that policy impacts diminish more quickly in the Mekong than elswhere. We suggest the Vietnamese government encourage Mekong Delta farmers to employ technologically more efficient methods or shift to more balanced farming to reduce the shadow price of GHG emissions, encouraging more efficient emissions reduction.

The Demand for Assets: Evidence from the Markov Switching Normalized Quadratic Model

AbstractIn this paper, we provide and illustrate a solution to the inter‐related problems of estimation of asset demand functions, instability of money demand relations, and monetary aggregation. We use an econometric framework that very flexibly allows for changes in the coefficients of the asset demand functions and then quantifying the implications that this asset demand instability has for monetary policy and monetary aggregation. Our approach allows the estimation of asset demand functions in a systems context, using a flexible functional form for the aggregator function, based on the dual approach to demand system generation. However, instead of assuming that consumer preferences are fixed as in the neoclassical demand theory, we assume Markov regime switching, thus allowing for complicated nonlinear dynamics and sudden changes in the parameters of the asset demand functions and the underlying aggregator function. We use the monthly time series data on monetary asset quantities and their user costs, recently produced for the United States and maintained within the Center of Financial Stability, and the Normalized Quadratic (NQ) flexible functional form with Markov regime switching, to generate inference in terms of a full set of elasticities, simultaneously achieving consistency with the data‐generating process and economic and econometric regularity. We find evidence that our five‐regime NQ model provides a better fit of the actual data than a single regime model, that the asset demand specifications exhibit instability between regimes, but are rather stable within regimes, and that the assets are in general Morishima substitutes with the Morishima elasticities of substitution always being below unity.

The demand for assets through a low-interest rate environment

ABSTRACT Asset demand is important in many areas of economics. To investigate this, we estimate a globally flexible dynamic Fourier asset demand specification and calculate Morishima elasticities of substitution for six asset categories for the U.S. This specification produces negative own price (user cost) elasticities. The Morishima elasticities show that each of the six asset groups is substitutes. These results suggest that monetary policy efficacy increases in recessions and support the Barnett Critique that central banks should not ignore substitution effects and portfolio adjustments among financial assets and Friedman and Schwartz’s view that saving deposit assets should be included in money.

Interfuel Substitution: Evidence from the Markov Switching Minflex Laurent Demand System with BEKK Errors

We investigate interfuel substitution in the United States using the minflex Laurent demand system and a century of data (from 1919 to 2012). We relax the assumption of constant parameters in the demand system, and also relax the ho-moskedasticity assumption, instead assuming that the covariance matrix of the errors is time-varying. Our results are consistent with theoretical regularity and indicate that the Morishima elasticities of substitution are always positive for all pairs of the energy goods (suggesting substitutability), but exhibit large swings across two regimes, generally being higher in the high demand volatility regime before the 1950s.

The Interfuel Substitutability in China’s Energy Transition: A National and Sectoral Level Analyses Using Normalized Quadratic Function

The substitutability between traditional fuels and modern fuels is essential for examine the possibility of energy transition. The existing literature on China’s interfuel substitution is mainly based on the translog function form and often the global curvature is not imposed. There is also a lack of a comprehensive analysis encompassing both the national and sectoral levels. This study fills the gap by estimating the Normalized Quadratic (NQ) cost and expenditure functions with global curvatures imposed. We analyse China’s provincial panel data from 2000 to 2012 both at national and sectoral levels: agriculture, industry, service and residential. Our analysis follows a two-stage process: first we estimate a nonlinear system of energy share equations using the Iterative Feasible Generalized Nonlinear Least Square (IFGNLS) method, and second, we calculate the Allen-Uzawa and Morishima elasticities of substitution. We have three main findings. First, the four main types of energy - coal, oil, gas and electricity - are overall substitutable, suggesting that China’s energy transition towards modern fuels is possible. Second, with the nation ascending the energy ladder from traditional to modern energy, the Morishima elasticities of substitution become more elastic, suggesting that a decrease in difficulty of energy transition in China. Third, the Morishima elasticities of substitution in the direction of modern energy price changes usually are greater than that in the direction of traditional energy price changes, suggesting that consumer behaviour change is more sensitive to the modern energy price fluctuations other than that of traditional energy. Overall, we conclude by providing a prospect of energy transitions in China, especially when the relative prices of modern energy are falling.

Did capital replace labor? New evidence from offshoring

Abstract Neoclassical theory explains the global decline of the labor income share by capital-labor substitution due to the affordable relative price of capital. Based on the Morishima elasticities of substitution among capital, labor disaggregated into high-, medium-, and low-skill groups, and imported and domestic intermediate inputs, offshoring appears to disproportionately affect job polarization globally and in developed economies. These findings in favor of the globalization hypothesis are buttressed by multivariate panel regressions. Lastly, offshoring might reinforce technological changes, a double-edged sword that can boost productivity growth but exacerbate wage inequality.

Monopolistic Competition, As You Like It

We study imperfect and monopolistic competition with asymmetric preferences over a variety of goods provided by heterogeneous firms. We show how to compute equilibria through the Morishima elasticities of substitution. Simple pricing rules and closed-form solutions emerge under monopolistic competition when demands depend on common aggregators. This is the case for Generalized Additively Separable preferences (encompassing additive preferences and their Gorman-Pollak extensions), implicitly additive preferences and others. For applications to trade, with markups variable across goods of different quality, and to macroeconomics, with markups depending on aggregate variables, we propose specifications of indirectly additive, self-dual addilog and implicit CES preferences.

PRODUCTIVE FACTORS AND INTERRELATIONSHIPS IN PRODUCTION OF THE SOYBEAN CROP IN MATO GROSSO

O trabalho tem por objetivo analisar as inter-relações entre os principais insumos utilizados no processo produtivo da cultura da soja convencional e transgênica em Mato Grosso e as suas possibilidades de substituição, por meio dos conceitos das elasticid

Pseudo panel data estimation technique and rational addiction model: an analysis of cigarette, alcohol and coffee demands

AbstractWe use a pseudo‐panel data approach to analyze the relationship between the consumptions of cigarettes, alcohol, and coffee in a rational addiction framework. We find that while cigarette and coffee demands fit well with the rational addiction model, alcohol demand conforms to a model with inventory effects. The results suggest that alcohol consumption increases the marginal utility derived from consumption of cigarettes. Increasing alcohol prices would decrease not only the consumption of alcohol, but also the consumption of cigarettes. On the other hand, increasing cigarette prices do not have the same effect on consumption of alcohol. The cross‐price elasticity of coffee with respect to cigarette price is positive and significant which suggests that coffee substitutes for cigarettes when cigarette prices increase. The cross‐price elasticity of alcohol with respect to coffee price is found to be negative and significant. On the other hand, Morishima elasticities of substitution indicate that cigarette, alcohol and coffee substitute each other along the indifference curve when relative prices change.

Changing Trends in U.S. Alcohol Demand

This study uses the Fourier globally flexible functional form and shows that elasticities of substitution for beer, wine and spirits vary over time. Own-price elasticities show that demand for alcohol is inelastic. Estimates of cross-price elasticities show much variation over time between spirits, wine and beer. Cross-price elasticities between beer and wine are generally elastic. Evidence of asymmetric substitution involving beer with wine or spirits suggests alcohol expenditure depends on which product undergoes a price change, which is typically not the case for spirits and wine. Changes in the demand for alcohol over time have important implications for the effectiveness of policy aimed at reducing externalities associated with heavy drinking. Morishima elasticities of substitution have different magnitudes compared to the cross-price elasticities but similar trends.

Sustainability characteristics of China's Poyang Lake Eco-Economics Zone in the big data environment

The Poyang Lake Eco-Economics Zone is a national zone that has been approved by State Council as part of China's national strategy for sustainable development in the largest lake area since 2009. In this study, we aim to examine its sustainability characteristics, including environmental efficiency, the shadow price of pollutants, and substitutability among inputs and outputs, so that to improve the environmental regulation in this area. For this purpose, we use the global non-radial directional distance function and its duality theory. By using the envelope model, the environmental efficiency indicator can be calculated. By employing the dual model of the non-radial directional distance function, the shadow prices and Morishima elasticities of substitution among inputs and outputs can be derived. We use the proposed method to conduct an empirical study of the Poyang Lake Eco-Economics Zone at the prefecture-level during the period from 2009 to 2013. Results show that many regions in the Poyang Lake Eco-Economics Zone are not performing well on environmental efficiency and have potential to improve by 31.9% on average. Meanwhile, the waste water has much lower shadow prices than the either sulfur dioxide or soot. On the other hand, with regard to the shadow prices of soot emission, approximately one-third of these regions were not charged anything for disposing soot emissions at any time of day or night during the 2009–2013 periods. Moreover, these 38 regions show energy-intensive as well as labor-intensive features. Finally, this paper also discusses the policy implications, including establishing the pollutant emissions trading system in China as well as encourage the technology innovation for energy saving and emission reduction.

General equilibrium models with Morishima elasticities of substitution in production

Analytical general equilibrium (AGE) models are important tools that economists use to answer questions about theory and policy. When a production function has three or more inputs, the traditional modeling technique employs Allen elasticities of substitution to represent general functional forms. This paper builds an analytical general equilibrium model using the Morishima elasticity of substitution (MES). Specifically, an existing model using Allen elasticities is reformulated to employ the MES and the new, closed-form solutions are interpreted with additional insights from the reformulation. Importantly, the special case of constant elasticity of substitution (CES) production follows directly when using Morishima elasticities, but not Allen elasticities. This paper also provides a general technique for switching from Allen to Morishima elasticities in any existing AGE model and demonstrates a one-to-one numerical equivalence regardless of the elasticity measure employed. Replicating prior results, plausible parameter values are applied to the reformulated model to analyze the source-side, distributional effects of a pollution tax and highlight how the Allen and Morishima elasticities differ.

Substitution elasticities between GHG-polluting and nonpolluting inputs in agricultural production: A meta-regression

This paper reports meta-regressions of substitution elasticities between greenhouse gas (GHG) polluting and nonpolluting inputs in agricultural production, which is the main feedstock source for biofuel in the U.S. We treat energy, fertilizer, and manure collectively as the “polluting input” and labor, land, and capital as nonpolluting inputs. We estimate meta-regressions for samples of Morishima substitution elasticities for labor, land, and capital vs. the polluting input. Much of the heterogeneity of Morishima elasticities can be explained by type of primal or dual function, functional form, type and observational level of data, input categories, number of outputs, type of output, time period, and country categories. Each estimated long-run elasticity for the reference case, which is most relevant for assessing GHG emissions through life-cycle analysis, is greater than 1.0 and significantly different from zero. Most predicted long-run elasticities remain significantly different from zero at the data means. These findings imply that life-cycle analysis based on fixed proportion production functions could provide grossly inaccurate measures of GHG of biofuel.

Factor substitution and procurement competition for forest resources in Sweden

The utilisation of forest resources in the energy sector has been increasing, partly caused by economic policies introduced to reduce the emission of greenhouse gases. This in turn has led to an increase in the procurement competition between the forest industries and the energy sector. A translog cost function approach is used to analyse the factor substitution in the sawmill industry, the pulp and paper industry and the heating industry in Sweden over the period 1970–2008. The estimated parameters are used to calculate the Allen and Morishima elasticities of substitution as well as the price elasticities of input demand. The results indicate that it is easier for the heating industry to substitutes between by-products and logging residues than it is for the pulp and paper industry to substitute between by-products and roundwood. This suggests that the pulp and paper industry could suffer from an increase in the procurement competition. However, overall the substitutions elasticities estimated in our study are relatively low. This indicates that substitution possibilities could be rather limited due to rigidities in input prices. This result suggests that competition of forest resources also might be relatively limited.

Changes in aggregate food demand over the business cycle

The globally flexible Fourier functional form is used to provide estimates of how substitution between types of food varies over time. Estimates of Morishima elasticities of substitution between food and nonfood aggregates often show considerable variability over time, typically during recessions. In contrast, estimates from locally flexible functional forms only provide estimates at a single data point and fail to provide insight into changes in substitution over the sample. Evidence of changes in substitution over time has important policy implications, especially attempts to encourage increased consumption of fruits and vegetables.

Capital–energy substitution: Evidence from a panel of Irish manufacturing firms

We use a translog cost function to model production in the Irish manufacturing sector over the period from 1991 to 2009. We estimate both own- and cross-price elasticities and Morishima elasticities of substitution between capital, labour, materials and energy. We find that capital and energy are substitutes in the production process. Across all firms we find that a 1% rise in the price of energy is associated with an increase of 0.04% in the demand for capital. The Morishima elasticities, which reflect the technological substitution potential, indicate that a 1% increase in the price of energy causes the capital/energy input ratio to increase by 1.5%. The demand for capital in energy-intensive firms is more responsive to increases in energy prices, while it is less responsive in foreign-owned firms. We also observe a sharp decline in firms' responsiveness in the first half of the sample period.

The Influence of Labor Price Change on Agricultural Machinery Usage in Chinese Agriculture

The substitution between rural labor and machinery has been a key determinant of farm production, structure, and efficiency in most developed countries and is expected to play a key role in shaping the future of Chinese agriculture. Using disaggregated farm‐level data from Hebei and Shandong provinces of China, we calculated the Allen and Morishima elasticities of substitution between labor and machinery. These elasticities were based on seemingly unrelated regressions and three‐stage least squares estimates of the translog cost function and input cost share functions. In contrast to previous studies, we dissaggregate machinery inputs into three categories: large, medium, and small. In addition, the issue of endogeneity in output quantity and input prices is also addressed. The results show strong evidence of substitution between labor and the three categories of machinery inputs. The findings also support substitution among the three categories of machinery themselves.

중국 화력발전산업의 CO2암묵가격 및 잠재감축량, 연료에 대한 대체가능성 분석

China, the world`s largest producer, is likely to be obligated to reduce greenhouse gas emissions under the post-Kyoto protocol. This paper estimates a Shephard input distance function for the Chinese fossil-fueled power generation sector to measure the shadow price of emissions, technical efficiency, and indirect Morishima elasticities of substitution between inputs. Empirical results show that, on average, it costs approximately 3.2 US dollars per year to reduce emissions by one ton over the period 1981-2009. This finding indicates that Chinese power sector is expected to benefit from selling emission permits to other countries such as Korea and Japan, given that our estimate for China is lower than the ones previous literatures estimated for the power sector in these countries. The maximum attainable average reduction potential amounts to approximately 25 million tons per year by improving technical efficiency. Capital is substitutable with both coal and oil and capital is relatively more readily substituted for these fuels.

The determinants of aggregated electricity intensity in China

This study provides technological change, factor demand and inter-factor substitutability measures for China electricity industry. We use individual fuel price data and translog factor cost function approach to estimate total factor cost functions and fuel share equations. The implied price and Morishima substitution elasticities for inter-factor are obtained. By estimating the substitution between factors, we try to explore the driving forces of aggregate electricity intensity. The results suggest that energy is substitutable to capital and complementary to labor regarding cross-price elasticity. Capital is Morishima substitution for energy and labor is complement to energy. Factor substitution, budget and technology effects contribute to the year-to-year volatility of electricity intensity in the proportion 62.5%:20.06%:17.44%.