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Determinacy Through Intertemporal Adjustment Costs

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Author Info
Berthold Herrendorf (Universidad Carlos III de Madrid and University of South$)
Akos Valentinyi (University of Southampton)

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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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Publisher 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.;

Find related papers by JEL classification:
E0 - Macroeconomics and Monetary Economics - - General
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mauro BAMBI & Omar LICANDRO, 2004. "(In)determinacy and Time-to-Build," Economics Working Papers ECO2004/17, European University Institute. [Downloadable!]
  2. Pengfei Wang & Yi Wen, 2007. "Imperfect competition and indeterminacy of aggregate output," Working Papers 2006-017, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
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