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Neoclassical Growth Model with Externalities

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Author Info
Berthold Herrendorf () (University of Southampton)
Akos Valentinyi () (University of Southampton)
Abstract

This paper explores the local stability properties of the steady state in the twosector neoclassical 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 labor 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 Institute of Economics, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0203.

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Length: 34 pages
Date of creation: Jul 2002
Date of revision:
Handle: RePEc:has:discpr:0203

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

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

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