Determinacy Through Intertemporal Capital Adjustment Costs
Berthold Herrendorf () and
Akos Valentinyi ()
No 3581, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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 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.
Keywords: capital adjustment costs; determinacy; local indeterminacy; local stability; sector-specific externality (search for similar items in EconPapers)
JEL-codes: E00 E30 (search for similar items in EconPapers)
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