Determinacy with Capital Adjustment Costs and Sector-Specific Capital

Economics

Further details

(with Berthold Herrendorf)

This paper studies whether equilibrium is indeterminate close to the steady state of a real business cycle model. We consider a version in which consumption and capital goods are produced in different sectors and there is a positive, sector-specific externality in the capital sector. The novelty is that installed capital is also assumed to be sector-specific and that there are some form of capital adjustment costs. We calibrate the model and find that for moderate adjustment costs indeterminacy is impossible irrespective of the strength of the externality. For more sizable adjustment costs indeterminacy occurs beyond a threshold value of increasing returns, which is the same as in the one-sector model and is usually considered to be empirically implausible.