originally proposed by Arrow, Chenery, A Minhas and Solow, the CES function was constrained to constant returns to scale. It has since been generalised to allow for any degree of homogeneity in the inputs. But the function is still constrained: if returns to scale are a when output is low, they are equally a when output is high. It is shown later in this paper that if this assumption is untrue, if what may be called point returns to scale are themselves functionally related to output, a common procedure for estimating the elasticity of substitution will generally be inconsistent, even if it would not otherwise have been so. To prove this, a modified CES function is derived in which point returns to scale are functionally related to output.

Monetary rules matter for the equilibrium rate of employment when the number of price-wage setters is small, even when assuming rational expectations, complete information, central bank precommitment, and absence of nominal rigidities. If the central bank is nonaccommodating, sufficiently large unions, bargaining independently, have an incentive to moderate sectoral money wages, and thereby expected real wages. The result is an increase in the real money supply, and hence higher demand and employment. This does not hold with accommodating monetary policy since unions' wage decisions cannot then affect the real money supply. A similar argument holds for large monopolistically competitive price setters.