We thank two anonymous referees for helpful comments and suggestions. We also thank Rainer Klump, Theodore Palivos, Stephen Turnovsky, and participants at Louisiana State University and the European Economic Association meetings 2005 for valuable discussions. Saam acknowledges Ph.D. scholarships from the German Exchange Council (DAAD) and the DekaBank, and travel grants from the Bundesbank and the Foundation for the Support of International Scientific Relations. The views expressed in this paper are the sole responsibility of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.
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Two-level CES Production Technology in the Solow and Diamond Growth Models†
Article first published online: 7 MAY 2008
DOI: 10.1111/j.1467-9442.2008.00529.x
© The editors of the Scandinavian Journal of Economics 2008
Additional Information
How to Cite
Papageorgiou, C. and Saam, M. (2008), Two-level CES Production Technology in the Solow and Diamond Growth Models. The Scandinavian Journal of Economics, 110: 119–143. doi: 10.1111/j.1467-9442.2008.00529.x
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Publication History
- Issue published online: 7 MAY 2008
- Article first published online: 7 MAY 2008
- First version submitted June 2006;final version received September 2007.
- Abstract
- Article
- References
- Cited By
Keywords:
- Two-level CES production functions;
- normalization;
- Solow model;
- Diamond model;
- economic growth
- E13;
- E23;
- O40;
- O47
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.