Determinacy through intertemporal capital adjustment costs
Determinacy through intertemporal capital adjustment costs
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.
capital adjustment costs, determinacy, indeterminacy, local stability, sector-specific externality
483-497
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096
Valentinyi, Ákos
89a3ce98-544f-448b-90fd-29c82e1916ab
2003
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096
Valentinyi, Ákos
89a3ce98-544f-448b-90fd-29c82e1916ab
Herrendorf, Berthold and Valentinyi, Ákos
(2003)
Determinacy through intertemporal capital adjustment costs.
Review of Economic Dynamics, 6 (3), .
(doi:10.1016/S1094-2025(03)00020-6).
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 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.
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Published date: 2003
Keywords:
capital adjustment costs, determinacy, indeterminacy, local stability, sector-specific externality
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Local EPrints ID: 33445
URI: http://eprints.soton.ac.uk/id/eprint/33445
ISSN: 1094-2025
PURE UUID: 586bc6a0-88f0-4784-8689-75edf8d029a2
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Date deposited: 16 May 2006
Last modified: 15 Mar 2024 07:44
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Author:
Berthold Herrendorf
Author:
Ákos Valentinyi
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