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Published online by Cambridge University Press:  08 February 2012

Peter McAdam
European Central Bank and University of Surrey
Alpo Willman
European Central Bank


We develop a framework for measuring and analyzing medium-run departures from balanced growth, and apply it to developments in the euro area. A time-varying factor-augmenting production function (mimicking directed technical change) with below-unitary substitution elasticity is shown to account for the observed dynamics of factor incomes shares, TFP growth, and its components. Based on careful data accounting, we also identify a rising markup and the importance of financial-market regulations in the 1970s. The balanced growth path emerges as a special (and testable) case of our framework, as do existing strands of medium-run debates.

Copyright © Cambridge University Press 2012 

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