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

  • Jang-Ting Guo

    ()

    (Department of Economics, University of California Riverside)

  • Chi-Ting Chin

    ()

    (Ming Chuan University)

  • Ching-Chong Lai

    ()

    (Academia Sinica National Chengchi University)

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 householdiÌs labor supply curve. By contrast, the econ- omy 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

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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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Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 200913.

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Length: 13 pages
Date of creation: Nov 2009
Date of revision: Nov 2009
Handle: RePEc:ucr:wpaper:200913
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