Multifactor CES general equilibrium: Models and applications

- Sector-specific CES elasticities are estimated using linked input-output tables.
- The jointly measured productivity changes are comparable to Tornqvist indexes.
- We calibrate multifactor CES general equilibrium models with estimated elasticities.
- We evaluate the economic welfare gain by the exogenous productivity improvements.

Sector-specific multifactor CES elasticities of substitution and the corresponding productivity growth are jointly measured by regressing the growth of per-factor cost shares against the growth of factor prices. We use linked input-output tables for Japan and the Republic of Korea as the data source for factor price and cost shares in two temporally distant states. We then construct a multisectoral general equilibrium model using the system of estimated CES unit cost functions and evaluate the economy-wide propagation of an exogenous productivity stimulus in terms of welfare. Further, we examine the differences between models based on a priori elasticities such as Leontief and Cobb-Douglas.