Determinacy Through Intertemporal Capital Adjustment Costs

Berthold Herrendorf and Akos Valentinyi ()
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Akos Valentinyi: University of Southampton

No 209, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: 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.

Keywords: capital adjustment costs; determinacy; local indeterminacy; local stability; sector-specific externality (search for similar items in EconPapers)
JEL-codes: E0 E3 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2002-10
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Working Paper: Determinacy Through Intertemporal Capital Adjustment Costs (2002)
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