G-Cubed Substitution elasticities
Table of contents
Production elasticities
Production functions are represented by a tiered structure, with each tier being either a Constant-Elasticity-of-Substitution (CES) function or a Cobb-Douglas (C-D) function. The elasticities of substitution for each tier have been estimated using US data (see McKibbin and Wilcoxen 1999). They are represented in G-Cubed models by parameters with sigma name prefixes.
If the elasticities of substitution are equal to 1, then a C-D function is used, otherwise a CES function is used.
If the elasticities of substitution are strictly between 0.99 and 1.01 but not equal to 1, an error is raised because a production function that is CES but close to a C-D can lead to numerical problems.
Note that there are elasticities of subsitution between:
- KLEM tier of the production function (
sigma_o) - Energy aggregation tier of the production function (
sigma_e) - Material goods (and services) tier of the production function (
sigma_m) - Aggregated goods from foreign regions and the same type goods produced domestically (
sigma_df) - Goods of the same type but from different foreign regions (
sigma_ff)
Note that the sectors that produce household capital and raw capital also have sigma_o, sigma_e, and sigma_m parameters.