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Determinacy Through Intertemporal Adjustment Costs

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  • Berthold Herrendorf

    (Universidad Carlos III de Madrid and University of South$)

  • Akos Valentinyi

    (University of Southampton)

Abstract

It is well known that if there are mild sector-specific externalities, then the steady state of the standard two-sector real business cycle model can become indeterminate and endogenous business cycles can arise. We show that this result is not robust to the introduction of standard intertemporal capital adjustment costs, which may accrue when total capital is adjusted or when each sector's capital is adjusted. We find for both forms of adjustments costs that the steady state is determinate for all empirically plausible parameter values. We also find that determinacy occurs for a much larger range of parameter values when adjusting each sector's capital is costly. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/S1094-2025(03)00020-6
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 3 (July)
Pages: 483-497

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Handle: RePEc:red:issued:v:6:y:2003:i:3:p:483-497

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Related research

Keywords: capital adjustment costs; determinacy; indeterminacy; local stability; sector-specific externality.;

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References

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Cited by:
  1. Pengfei Wang & Yi Wen, 2007. "Imperfect competition and indeterminacy of aggregate output," Working Papers 2006-017, Federal Reserve Bank of St. Louis.

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