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On the Stability of the Two-Sector Neoclassical Growth Model with Externalities

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Author Info
Herrendorf, Berthold
Valentinyi, Akos

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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3435.

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Date of creation: Jun 2002
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Handle: RePEc:cpr:ceprdp:3435

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Related research
Keywords: capital adjustment costs; determinacy; externality; local indeterminacy; stability;

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Find related papers by JEL classification:
E00 - Macroeconomics and Monetary Economics - - General - - - General
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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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. Nicholas Sim, 2005. "Indeterminacy, Stabilization Policy and Returns to Scale: A Re-Investigation," Contributions to Macroeconomics, Berkeley Electronic Press, vol. 5(1), pages 1251-1251. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Herrendorf, Berthold & Valentinyi, Akos, 2002. "Determinacy Through Intertemporal Capital Adjustment Costs," CEPR Discussion Papers 3581, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. David R. Stockman, 2007. "Chaos and Sector-specific Externalities," Working Papers 07-17, University of Delaware, Department of Economics. [Downloadable!]
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