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On the stability of the two-sector neoclassical growth model with externalities

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  • Herrendorf, Berthold
  • Valentinyi, Akos

Abstract

This Paper explores the local stability properties of the steady state in the two-sector neo-classical growth model with sector–specific externalities. We show analytically that capital adjustment costs of any size preclude local indeterminacy nearby the steady state for every empirically plausible specification of the model parameters. More specifically, we show that when capital adjustment costs of any size are considered, a necessary condition for local indeterminacy is an upward-sloping labour demand curve in the capital-producing sector, which in turn requires an implausibly strong externality. We show numerically that capital adjustment costs of plausible size imply determinacy nearby the steady state for empirically plausible specifications of the other model parameters. These findings contrast sharply with the previous finding that local indeterminacy occurs in the two-sector model for a wide range of plausible parameter values when capital adjustment costs are abstracted from.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 30 (2006)
Issue (Month): 8 (August)
Pages: 1339-1361

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Handle: RePEc:eee:dyncon:v:30:y:2006:i:8:p:1339-1361

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Citations

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Cited by:
  1. Berthold Herrendorf & Akos Valentinyi, 2003. "Determinacy Through Intertemporal Adjustment Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 483-497, July.
  2. David R. Stockman, 2007. "Chaos and Sector-specific Externalities," Working Papers 07-17, University of Delaware, Department of Economics.
  3. Berthold Herrendorf & Akos Valentinyi, 2002. "Determinacy Through Intertemporal Capital Adjustment Costs," IEHAS Discussion Papers 0209, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  4. Zhang, Jin Shui, 2011. "The analytical solution of balanced growth of non-linear dynamic multi-sector economic model," Economic Modelling, Elsevier, vol. 28(1-2), pages 410-421, January.

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