Preference structure and volatility in a financially integrated world

This paper investigates a two-country model of capital accumu-lation with country-specific production externalities. The main con-cern of our discussion is to explore the presence of equilibrium in-determinacy in an open-economy setting. In contrast to the exist-ing studies on equilibrium indeterminacy in small-open economies, the present paper demonstrates that opening up international trade and financial interactions between two counties does not necessar-ily enhance the possibility of indeterminacy of equilibrium. It is shown that the results depend heavily upon not only on the degree of external increasing returns but also on the preference structures