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Determinacy Through Intertemporal Adjustment Costs

Author

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  • Berthold Herrendorf

    (Universidad Carlos III de Madrid)

  • 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)

Suggested Citation

  • 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.
  • Handle: RePEc:red:issued:v:6:y:2003:i:3:p:483-497 DOI: 10.1016/S1094-2025(03)00020-6
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    References listed on IDEAS

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    Cited by:

    1. Wang, Pengfei & Wen, Yi, 2008. "Imperfect competition and indeterminacy of aggregate output," Journal of Economic Theory, Elsevier, vol. 143(1), pages 519-540, November.

    More about this item

    Keywords

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

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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