Two‐level CES Production Technology in the Solow and Diamond Growth Models* |
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Authors: | Chris Papageorgiou Marianne Saam |
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Affiliation: | 1. International Monetary Fund, Washington, DC 20431, USA cpapageorgiou@imf.org;2. Centre for European Economic Research (ZEW), D‐68034 Mannheim, Germany saam@zew.de |
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Abstract: | The two‐level CES aggregate production function—that nests a CES into another CES function—has recently been used extensively in theoretical and empirical applications of macroeconomics. We examine the theoretical properties of this production technology and establish existence and stability conditions of steady states under the Solow and Diamond growth models. It is shown that in the Solow model the sufficient condition for a steady state is fulfilled for a wide range of substitution parameter values. This is in sharp contrast with the two‐factor Solow model, where only an elasticity of substitution equal to one is sufficient to guarantee the existence of a steady state. In the Diamond model, multiple equilibria can occur when the aggregate elasticity of substitution is lower than the capital share. Moreover, it is shown that for high initial levels of capital and factor substitutability, the effect of a further increase in a substitution parameter on the steady state depends on capital–skill complementarity. |
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Keywords: | Two‐level CES production functions normalization Solow model Diamond model economic growth E13 E23 O40 O47 |
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