2010 Discussion Papers
School of Economics Discussion Paper 10/07
A Note on Balanced Growth with a less than Unitary Elasticity of Substitution
Miguel A. León-Ledesma and Mathan Satchi
University of Kent
We present a simple production technology in which the choice of production technique results in a balanced growth path even in the presence of capital-augmenting technical progress. Given a particular choice of technique, the production function is CES with a less than unitary elasticity of factor substitution. The form of this production technology is also invariant to the choice of units, allowing us to abstract from the normalization considerations that often accompany the use of CES. The approach yields a balanced growth path but short-run time-varying factor shares without requiring an explicit model of the R&D sector.
JEL Classification: E25, O33, O40.
Keywords: Balanced growth, capital-augmenting technical progress, measurement units, elasticity of substitution.
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A revised version of this paper has been released as 11/13.