Flexibly Nested Production Functions: Implementation for MONASH

This paper describes the implementation for the MONASH model of a scheme for flexible nesting of production functions. The scheme supports substitution in production between different commodities and between commodities and primary factors, which the standard ORANI production system does not. Thus it supports more flexible functional forms than standard ORANI. More importantly, this treatment supports not just a single functional form but a wide variety of functional forms, built up by the nesting of CES aggregator functions. The number of CES aggregator functions, their membership, and the depth of nesting are all arbitrary. These features of the nesting structure are now specified not in the theoretical structure in the database. Thus the production structure can readily be modified to meet the special requirements of individual applications. We illustrate the use of the flexible nesting treatment with an application to inter-fuel and energy-capital substitution.