Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108038
Authors: 
Herrendorf, Berthold
Valentinyi, Akos
Year of Publication: 
2002
Series/Report no.: 
IEHAS Discussion Papers MT-DP - 2002/3
Abstract: 
This paper explores the local stability properties of the steady state in the twosector neoclassical growth model with sector–specific externalities. We show analytically that capital adjustment costs of any size preclude local indeterminacy nearby the steady state for every empirically plausible specification of the model parameters. More specifically, we show that when capital adjustment costs of any size are considered, a necessary condition for local indeterminacy is an upward-sloping labor demand curve in the capital-producing sector, which in turn requires an implausibly strong externality. We show numerically that capital adjustment costs of plausible size imply determinacy nearby the steady state for empirically plausible specifications of the other model parameters. These findings contrast sharply with the previous finding that local indeterminacy occurs in the two-sector model for a wide range of plausible parameter values when capital adjustment costs are abstracted from.
Subjects: 
capital adjustment costs
determinacy
externality
local indeterminacy
stability.
JEL: 
E0
E3
Document Type: 
Working Paper

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