Estimate of Elasticity of Substitution of Inputs in Slovak Economy

Abstract

The elasticity of substitution between labour and capital in the Slovak economy is estimated in the paper. We used an econometric specification of capital and labour demand and data from the National Bank of Slovakia's macroeconomic database. In order to filter the processes caused by short-term shocks, the data were adjusted using the frequency filter. Using the Breusch and Pagan test, we have shown that the stochastic terms of capital and labour demand are related. Therefore, we did not use only the least squares method to estimate both specifications, but we also estimated a system of two equations with seemingly unrelated regression. The paper is extended with a discussion showing that the relatively low value of the input substitution elasticity could theoretically be explained by the transitive nature of the Slovak economy during the studied period. The elasticity of substitution between labour and capital in the Slovak economy was relatively low in the period 1997-2014; we estimated its value in the range from 0.03 to 0.11 depending on the choice of the database version.