Abstract
This paper presents a small open economy version of the J. Benhabib and R. E. A. Farmer (1996, J. Monet. Econ.37, 421–443) two sector optimal growth model with production externalities. It is shown that indeterminacy is considerably easier to obtain under a regime of perfect world capital markets than in the closed economy variant. Furthermore, the result is not dependent on a high labor supply elasticity since that input is fixed. The paper also examines a variant which takes into account external borrowing constraints and it is shown that the qualitative results on indeterminacy remain basically unaffected by this extension. Journal of Economic Literature Classification Numbers: E32, F12.
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