Two-Level CES Production Technology in the Solow and Diamond Growth Models

26 Pages Posted: 9 May 2008

See all articles by Chris Papageorgiou

Chris Papageorgiou

International Monetary Fund (IMF) - Research Department

Marianne Saam

ZEW – Leibniz Centre for European Economic Research - Information and Communication Technologies Research Group

Date Written: 2007-09

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.

Suggested Citation

Papageorgiou, Chris and Saam, Marianne, Two-Level CES Production Technology in the Solow and Diamond Growth Models (2007-09). Scandinavian Journal of Economics, Vol. 110, Issue 1, pp. 119-143, March 2008. Available at SSRN: https://ssrn.com/abstract=1131009 or http://dx.doi.org/10.1111/j.1467-9442.2008.00529.x

Chris Papageorgiou

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Marianne Saam

ZEW – Leibniz Centre for European Economic Research - Information and Communication Technologies Research Group ( email )

D-68034 Mannheim
Germany

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