Real money balances in production function: a translog profit function approach

Abstract

This thesis examines the role of real money balances in production function as a factor. A transcendental logarithmic (translog) profit function is estimated with share equations for disaggregated 2 digit Canadian manufacturing industries which are clothing, food, furniture, and wood industries using Zellner’s seemingly unrelated algorithm in the TSP computer programme. Both long-run and short-run profit maximizing elasticities are computed. Based upon the results of price elasticities, we have evidence for a significant role o f real money balances in production function as a factor both in long-run and short-run. Another interesting result that emerges from our study is the significance of the potential supply side effects of changes in the interest rate on both labor demand and supply o f output.