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The Choice of CES Production Techniques and Balanced Growth

Author

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  • Miguel A. Leon-Ledesma

    ()

  • Mathan Satchi

    ()

Abstract

We show that allowing firms a choice of CES production techniques (via the distribution parameter between capital and labor) can result in a new class of production functions that produces short-run capital-labor complementarity but yields a long-run unit elasticity of substitution. This is shown to occur if we provide a mathematical framework for this choice that maintains strict essentiality of the production process and satisfies the requirement of unit-invariance. The class of production functions derived are consistent with a balanced growth path even in the presence of capital-augmenting technical progress. The approach yields a simple yet powerful way of introducing CES-type production functions in macroeconomic models.

Suggested Citation

  • Miguel A. Leon-Ledesma & Mathan Satchi, 2011. "The Choice of CES Production Techniques and Balanced Growth," Studies in Economics 1113, School of Economics, University of Kent.
  • Handle: RePEc:ukc:ukcedp:1113
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    References listed on IDEAS

    as
    1. Joseph Zeira, 1998. "Workers, Machines, and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 113(4), pages 1091-1117.
    2. Cristiano Cantore & Miguel León-Ledesma & Peter McAdam & Alpo Willman, 2014. "Shocking Stuff: Technology, Hours, And Factor Substitution," Journal of the European Economic Association, European Economic Association, vol. 12(1), pages 108-128, February.
    3. Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-1357, September.
    4. Klump, Rainer & Saam, Marianne, 2008. "Calibration of normalised CES production functions in dynamic models," Economics Letters, Elsevier, vol. 99(2), pages 256-259, May.
    5. Charles I. Jones & Dean Scrimgeour, 2008. "A New Proof of Uzawa's Steady-State Growth Theorem," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 180-182, February.
    6. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
    7. Ricardo Lagos, 2006. "A Model of TFP," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 983-1007.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Miguel A. Leon-Ledesma & Mathan Satchi, 2015. "Appropriate Technology and Balanced Growth," Studies in Economics 1614, School of Economics, University of Kent, revised Nov 2016.
    2. Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2015. "Production Technology Estimates and Balanced Growth," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(1), pages 40-65, February.
    3. Cantore, C. & Levine, P., 2012. "Getting normalization right: Dealing with ‘dimensional constants’ in macroeconomics," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1931-1949.
    4. Cantore, Cristiano & Levine, Paul & Pearlman, Joseph & Yang, Bo, 2015. "CES technology and business cycle fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 133-151.
    5. repec:ehl:lserod:56407 is not listed on IDEAS
    6. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.
    7. Miguel A León-Ledesma & Peter McAdam & Alpo Willman, 2012. "Non-Balanced Growth and Production Technology Estimation," Studies in Economics 1204, School of Economics, University of Kent.
    8. Miguel A. Leon-Ledesma & Mathan Satchi, 2015. "Appropriate Technology and the Labour Share," Studies in Economics 1505, School of Economics, University of Kent, revised Nov 2016.
    9. Growiec, Jakub, 2013. "A microfoundation for normalized CES production functions with factor-augmenting technical change," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2336-2350.
    10. Gerba, Eddie, 2015. "Have the US macro-financial linkages changed? The balance sheet dimension," LSE Research Online Documents on Economics 59886, London School of Economics and Political Science, LSE Library.
    11. Mehdi Senouci, 2014. "The Habakkuk hypothesis in a neoclassical framework," Working Papers hal-01206032, HAL.

    More about this item

    Keywords

    Balanced growth; production technique; biased technology; elasticity of substitution;

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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