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Determinacy through intertemporal capital adjustment costs

Herrendorf, B. and Valentinyi, Akos 2003. Determinacy through intertemporal capital adjustment costs. Review of Economic Dynamics 6 (3) , pp. 483-497. 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 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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HG Finance
Uncontrolled Keywords: Capital adjustment costs; Determinacy; Indeterminacy; Local stability; Sector-specific externality
Publisher: Elsevier
ISSN: 1094-2025
Last Modified: 01 Feb 2017 04:16

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