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Instability and growth due to adjustment costs

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  • This paper provides a new and surprising reason for growth, namely costs. More precisely, adding adjustment costs of the control to a one-dimensional, strictly concave optimal control problem does not affect the steady state(s). Then, sufficiently high adjustment costs turn an interior and saddle-point stable steady state of the original, one-state variable model into a source that can lead to unbounded growth. Given a version of the open economy Ramsey model, the initial conditions determine whether unbounded growth or impoverishment results. Related to this threshold property, the strict concave two-state variable control model allows for thresholds even if it has a unique and stable steady state.
    Mathematics Subject Classification: Primary: 91B62, 91B55; Secondary: 49J15, 58E25.


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