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Indeterminacy And Investment Adjustment Costs In An Endogenously Growing Small Open Economy

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Executive Summary

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

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