Interrelated Factor Demands from Dynamic Cost Functions: An Application to the Non‐energy Business Sector of the UK Economy

Abstract

In this paper we propose a dynamic cost function which allows us consistently to derive a set of dynamic interrelated factor demand equations in the general error correction form introduced by Anderson and Blundell (1982). This paper expands results recently published in Urga (1996). It shows that the derivation of an effective underlying cost function allows us to identify the full set of parameters of the underlying process. This does not happen in the standard Anderson–Blundell formulation. We report an empirical exercise, used to model the so‐called ‘supply side’ of the London Busines School large‐scale economic model, where we estimate both the set of factor demands and the underlying dynamic cost function for the non‐energy business sector of the UK economy.

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