Determinacy Through Intertemporal Capital Adjustment Costs

24 Pages Posted: 15 Nov 2002

See all articles by Berthold Herrendorf

Berthold Herrendorf

Arizona State University (ASU) - Economics Department

Akos Valentinyi

University of Manchester; CERS-HAS; CEPR

George P. Baker

HBS Negotiations, Organizations and Markets Unit; National Bureau of Economic Research (NBER)

Date Written: October 2002

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 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

JEL Classification: E00, E30

Suggested Citation

Herrendorf, Berthold and Valentinyi, Akos and Baker, George P., Determinacy Through Intertemporal Capital Adjustment Costs (October 2002). Available at SSRN: https://ssrn.com/abstract=350522

Berthold Herrendorf (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Akos Valentinyi

University of Manchester ( email )

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Manchester, M13 9PL
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CERS-HAS ( email )

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CEPR

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George P. Baker

HBS Negotiations, Organizations and Markets Unit ( email )

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