A note on indeterminacy and investment adjustment costs in an endogenously growing small open economy

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. Copyright © 2012 Cambridge University Press.