Neoclassical Growth Model with Externalities

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IEHAS Discussion Papers ; No. MT-DP - 2002/3

Classification and Topics

• Classification: Wirtschaft
• Subject: capital adjustment costs ; determinacy ; externality ; local indeterminacy ; stability.

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Herrendorf, Berthold ; Valentinyi, Akos
• Event: Veröffentlichung
• (who): Hungarian Academy of Sciences, Institute of Economics
• (where): Budapest
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/108038
• Last update: 10.03.2025, 11:42 AM CET