Sunspots, cycles and adjustment costs in the two-sectors model

Abstract

Do adjustment costs able to modify the dynamic of the two sectors model? We examine the impact of adjustment costs in capital on the properties of long-run equilibrium. We propose to analyse how the positive and negative degrees of adjustment costs could interplay with the local indeterminacy mechanism coming from the presence of sector specific externalities. When the adjustments costs function is convex there exists a Höpf bifurcation and the trajectory describes a cycle around the steady state. We give an heuristic economic explanation of the role of the adjustment costs leading to economic cycles.