Journal
ECONOMIC MODELLING
Volume 28, Issue 6, Pages 2832-2841Publisher
ELSEVIER
DOI: 10.1016/j.econmod.2011.08.014
Keywords
General equilibrium; KLEM production function; Separability assumptions
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Funding
- EPSRC [EP/E040136/1] Funding Source: UKRI
- ESRC [ES/F000030/1] Funding Source: UKRI
- Economic and Social Research Council [ES/F000030/1] Funding Source: researchfish
- Engineering and Physical Sciences Research Council [EP/E040136/1] Funding Source: researchfish
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This paper examines the impact of imposing different separability assumptions in the specifications of the standard hierarchical KLEM production function in a computable general equilibrium (CGE) model. The appropriate means of introducing energy to production functions has been a source of debate for a number of years. However, while modellers often subject results to parametric sensitivy analysis regarding the values associated with elasticities of substitution between inputs, it is rarely the case that the structure of the production function is subjected to testing. However, the chosen structure reflects the modeller's view about elasticity between different inputs and will have implications for model results wherever there are changes in relative prices. We illustrate our argument by introducing a simple demand shock to a CGE model of the Scottish economy (targeted at the energy supply sector) under different assumptions regarding the structure of the KLEM production function and separability assumptions therein. (C) 2011 Elsevier B.V. All rights reserved.
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