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What does it mean to change an elasticity? | Jordan Rosenthal-Kay

jrosenthalkay.github.io · 1,824 words · saved by 1 readers

How would changing housing supply elasticities affect output? If AI induces a change in capital’s share of income, will that affect short-run growth and steady-state income per capita? These types of questions have been approached by performing “change elasticity” counterfactuals in quantitative models. They sound straightforward (indeed, I perform one in my JMP): we shock TFP all the time, so why can’t we change other parts of the production technology? It turns out that these counterfactuals aren’t really well-defined absent additional structure or shocks. Elasticities govern how parts of an economic system react to changes. A better posed question might be, how much larger would economic growth have been had housing supply elasticities been higher? For a given quantified model, however, changing elasticities and holding all else fixed can induce changes that depend arbitrarily on the units of the data to which the model was calibrated.

Oct 15, 2026 How would changing housing supply elasticities affect output? If AI induces a change in capital’s share of income, will that affect short-run growth and steady-state income per capita? These types of questions have been approached by performing “change elasticity” counterfactuals in quantitative models. They sound straightforward (indeed, I perform one in my JMP): we shock TFP all the time, so why can’t we change other parts of the production technology? It turns out that these counterfactuals aren’t really well-defined absent additional structure or shocks. Elasticities govern…

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