Preferences, endogenous discount rate, and indeterminacy in a small open economy model

This paper characterizes indeterminacy conditions for a small open economy business cycle model. The preferences are the utility function commonly used in closed-economy models in the literature, coupled with an endogenously determined discount rate. It shows that indeterminacy can occur under arbitrarily small external effects, independently of the intertemporal elasticities in consumption and labor supply. (C) 2004 Elsevier B.V. All rights reserved.