Business Sector Production in the Short and Long Run in Israel

Engle-Granger representation theory is used to estimate the secular and cyclical determinants of business output in Israel during 1960-1988. The specification of the secular production function is based on the technique of cointegration, while the cyclical, or short-term, production function is specified in terms of an error correction model. In the preferred model of the secular production function returns to scale are slightly increasing and the productivity of Palestinian workers is approximately 40% of Israeli workers. In the short-term production function total factor productivity is pro-cyclical.