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 cons
iderably easier to obtain under a regime of perfect world capital markets t
han in the closed economy variant. Furthermore. the result is not dependent
on a high labor supply elasticity since that input is fixed. The paper als
o examines a variant which takes into account external borrowing constraint
s and it is shown that the qualitative results on indeterminacy remain basi
cally unaffected by this extension. (C) 2001 Academic Press.