Capital-Labor Substitution, Sector-Specific Externalities and Indeterminacy

This paper examines the effect of the elasticity of technological substitution on the existence of equilibrium indeterminacy in two-sector economies. Recent empirical evidence, the elasticity of substitution between capital and labor is below unity. We ?nd that this requires a higher degree of productive externalities in order to still be able to produce indeterminate equilibria. However, indeterminacy is maintained for empirically realistic rates of substitution.