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

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 in aggregate production.