The paper provides a statistical test to assess the adequacy of the static equilibrium framework which can be used prior to specifying a fully dynamic equilibrium model. We develop and apply this test to the production structure and factor demand equations based on the theory of restricted cost functions. This diagnostic test can also be used in other areas of applied economics, such as consumer demand and labor supply studies, where the analyst faces the choice between static and dynamic models of economic behavior. The framework is used to calculate rates of return to quasi-fixed factors, to measure the extent of over- and underinvestment in such factors, to adjust measured productivity growth for departures from static equilibrium, and to provide measures of marginal Tobin's q for individual assets that could be used to model investment functions for those assets.
ASJC Scopus subject areas
- Economics and Econometrics