Determinacy through intertemporal capital adjustment costs

Berthold Herrendorf, Ákos Valentinyi

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

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 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.

Original languageEnglish (US)
Pages (from-to)483-497
Number of pages15
JournalReview of Economic Dynamics
Volume6
Issue number3
DOIs
StatePublished - Jul 2003
Externally publishedYes

Keywords

  • Capital adjustment costs
  • Determinacy
  • Indeterminacy
  • Local stability
  • Sector-specific externality

ASJC Scopus subject areas

  • Economics and Econometrics

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