DEPARTMENT OF ECONOMICS WORKING PAPER SERIES Two-Level CES Production Technology in the Solow and Diamond Growth Models

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. This paper examines its theoretical properties and establishes existence and stability conditions of equilibria under the Solow and Diamond growth models. In addition, it examines the effect of changes in substitution parameters on transitional growth and steady states. It is shown that in the Solow model, the sufficient condition for a steady state is fulfilled for a larger range of substitution parameter values than with the basic CES function. In the Diamond model an increase in substitution parameters results in higher transitional growth under weaker conditions than with the basic CES function.