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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.

It has been widely known that neoclassical growth models with sufficient increasing returns in production may feature indeterminacy. This note analytically shows that investment adjustment costs increase the required degree of increasing returns for indeterminacy to arise. Under empirically plausible levels of investment adjustment costs, we need an implausibly large degree of increasing returns to generate indeterminacy.

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

INDETERMINACY AND INVESTMENT ADJUSTMENT COSTS: AN ANALYTIC RESULT

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

INDETERMINACY AND INVESTMENT ADJUSTMENT COSTS: AN ANALYTIC RESULT