Capital, Energy and Labour Substitution : The Supply Block in OECD Medium-Term Models

This paper sets out the various stages in the construction and estimation of a supply block for medium-term projection models. It describes the theoretical basis for the specification chosen and the estimation results. The basic block is a set of production factor demand functions. It is refined by modelling the scrapping behaviour of firms, introducing the effects stemming from movements in hours worked, and examining the role of profits. Other possible changes or improvements are outlined. The model is used to simulate the effects of movements in the relative prices of labour, capital and energy in recent years ...