Working Paper: CEPR ID: DP2585
Authors: Mark Weder
Abstract: This paper presents a small open economy version of the Benhabib and Farmer [2] 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 high labour supply elasticity since that input is fixed. The paper also examines a variant that takes into account external borrowing constraints and it is shown that the qualitative results on indeterminacy remain basically unaffected by this extension.
Keywords: Increasing returns; Indeterminacy; Small open economies
JEL Codes: E32; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Perfect Capital Markets (G19) | Indeterminacy (D89) |
| Indeterminacy (D89) | Returns to Scale (D24) |
| Perfect Capital Markets (G19) | Returns to Scale (D24) |
| External Borrowing Constraints (F34) | Indeterminacy (D89) |