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A NOTE ON INDETERMINACY AND INVESTMENT ADJUSTMENT COSTS IN AN ENDOGENOUSLY GROWING SMALL OPEN ECONOMY

Published online by Cambridge University Press:  14 May 2012

Chi-Ting Chin ,
Jang-Ting Guo  and
Ching-Chong Lai
Chi-Ting Chin
Affiliation:
Ming Chuan University
Jang-Ting Guo*
Affiliation:
University of California, Riverside
Ching-Chong Lai
Affiliation:
Institute of Economics, Academia Sinica and National Chengchi University
*
Address correspondence to: Jang-Ting Guo, Department of Economics, University of California, Riverside, Riverside, CA 92521-0427, USA; e-mail: guojt@ucr.edu.
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Abstract

This note analytically examines the interrelations between macroeconomic (in)stability and investment adjustment costs in a one-sector endogenously growing small–open economy representative-agent model. We show that under costly capital accumulation, the economy exhibits indeterminacy and sunspots if and only if the equilibrium wage–hours locus slopes upward and is steeper than the household's labor supply curve. By contrast, the economy without adjustment costs for capital investment always displays saddlepath stability and equilibrium uniqueness, regardless of the degree of increasing returns inaggregate production.

Keywords

IndeterminacyInvestment Adjustment CostsEndogenous GrowthSmall Open Economy
Type
Notes
Information
Macroeconomic Dynamics , Volume 16 , Supplement S3 , November 2012 , pp. 438 - 450
Copyright
Copyright © Cambridge University Press 2012

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