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Indeterminacy and Investment Adjustment Costs in an Endogenously Growing Small Open Economy

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  • Jang-Ting Guo

    () (Department of Economics, University of California Riverside)

  • Chi-Ting Chin

    () (Ming Chuan University)

  • Ching-Chong Lai

    () (Academia Sinica National Chengchi University)

Abstract

This paper analytically examines the interrelations between macroeconomic (in)stability and investment adjustment costs in a one-sector endogenously growing small-open-economy representative agent model. We show that under costly capital accumulation, the economy exhibits indeterminacy and sunspots if and only if the equilibrium wage-hours locus slopes upwards and is steeper than the householdiÌ s labor supply curve. By contrast, the economy without adjustment costs for capital investment always displays saddle-path stability and equilibrium uniqueness, regardless of the degree of increasing returns in aggregate production.Â

Suggested Citation

  • Jang-Ting Guo & Chi-Ting Chin & Ching-Chong Lai, 2009. "Indeterminacy and Investment Adjustment Costs in an Endogenously Growing Small Open Economy," Working Papers 200913, University of California at Riverside, Department of Economics, revised Nov 2009.
  • Handle: RePEc:ucr:wpaper:200913
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    File URL: http://economics.ucr.edu/repec/ucr/wpaper/09-13.pdf
    File Function: First version, 2009
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    Cited by:

    1. Lai, Chung-hui, 2013. "(In)determinacy, bargaining, and R&D policies in an economy with endogenous technological change," Economics Discussion Papers 2013-14, Kiel Institute for the World Economy (IfW).

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