Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108036
Authors: 
Herrendorf, Berthold
Valentinyi, Akos
Year of Publication: 
2002
Series/Report no.: 
IEHAS Discussion Papers MT-DP - 2002/9
Abstract: 
It is well known that if mild sector–specific externalities are considered, 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.
Subjects: 
capital adjustment costs
determinacy
local indeterminacy
local stability
sector-specific externality
JEL: 
E0
E3
Document Type: 
Working Paper

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