Cobb-Douglas Production Function Revisited, VAR and VECM Analysis and a Note on Fischer/Cobb-Douglass Paradox

22 Pages Posted: 15 Feb 2012 Last revised: 27 Nov 2012

See all articles by Dushko Josheski

Dushko Josheski

University Goce Delcev

Darko Lazarov

University Goce Delcev

Cane Koteski

University Goce Delcev

Date Written: September 20, 2011

Abstract

Cobb-Douglas production function is a basic function in growth models. The modeling in this paper showed that VAR is stable; KPSS test showed that output, capital and labor are not trend stationary. Johansen’s co-integration test showed that a requirement for Fischer/Cobb-Douglass paradox to work is met at 3 lags, there factor shares are I(0). The Fisher/Cobb-Douglas Paradox is based on constant factor shares. (In terms of time-series analysis, such constancy is equivalent to factor shares being I(0). The Fisher/Cobb-Douglas Paradox is thus why the estimated σ equals unity independent of the underlying production technologies generating the simulated data. At 4 lags however these variables are I(1) variables i.e. Cobb-Douglass is not CES function anymore. ADF test for factors of production showed that natural logarithm of capital is stationary variable, while log of labor is not-stationary except at 10% level of significance. Adjustment parameters showed that labour responds more/faster than loutput (log of GDP) and lcapital on if there is change/shock in the system. VECM model failed the stability eingevalues test.

Keywords: Fisher/Cobb-Douglas Paradox, cointegration, VAR, VECM, ADF test, unit root

JEL Classification: 040, B23

Suggested Citation

Josheski, Dushko and Lazarov, Darko and Koteski, Cane, Cobb-Douglas Production Function Revisited, VAR and VECM Analysis and a Note on Fischer/Cobb-Douglass Paradox (September 20, 2011). Available at SSRN: https://ssrn.com/abstract=1931117 or http://dx.doi.org/10.2139/ssrn.1931117

Dushko Josheski (Contact Author)

University Goce Delcev ( email )

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HOME PAGE: http://www.ugd.edu.mk/

Darko Lazarov

University Goce Delcev ( email )

PO box 201
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Macedonia
+389 550 317 (Phone)

Cane Koteski

University Goce Delcev ( email )

PO box 201
Stip, 2000
Macedonia

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