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Determinacy through intertemporal capital adjustment costs

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

Record type: Article


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


Local EPrints ID: 33445
ISSN: 1094-2025
PURE UUID: 586bc6a0-88f0-4784-8689-75edf8d029a2

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Date deposited: 16 May 2006
Last modified: 17 Jul 2017 15:52

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Author: Berthold Herrendorf
Author: Ákos Valentinyi

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