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Determinacy Through Intertemporal Capital Adjustment Costs

  • Berthold Herrendorf

    ()

    (University of Southampton)

  • Akos Valentinyi

    ()

    (University of Southampton)

It is well known that if mild sector–specific externalities are considered, then the steady state of the standard two-sector real business cycle model can become locally 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 adjustment 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.

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0209.

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Length: 19 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:has:discpr:0209
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