Determinacy through intertemporal capital adjustment costs

Herrendorf, Berthold and Valentinyi, Ákos (2003) Determinacy through intertemporal capital adjustment costs. Review of Economic Dynamics, 6, (3), 483-497. (doi:10.1016/S1094-2025(03)00020-6).


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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 adjustments 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.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1016/S1094-2025(03)00020-6
ISSNs: 1094-2025 (print)
Related URLs:
Keywords: capital adjustment costs, determinacy, indeterminacy, local stability, sector-specific externality
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
H Social Sciences > HM Sociology
Divisions : University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 33445
Accepted Date and Publication Date:
Date Deposited: 16 May 2006
Last Modified: 31 Mar 2016 11:59

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