OPEN-ECONOMY MARKET: Price Adjustment 3

In the case of no habit persistence (h = 0), (6.3) collapses to the standard consumption Euler equation relating E,Ac/+1 to the real interest rate. Reading here Furthermore, in a closed economy, the h – 0 case would imply a version of the optimizing IS equation that is used in Kerr and King (1996), Woodford (1996), and McCallum and Nelson (1997).

The other equations in our model include:

Here (6.10) shows that output is consumed or exported; imports do not appear because Г, is gross output, not value added. Equation (6.11) is our aggregate supply equation (5.9), shifted forward one period. Equation (6.12) is obtained from (5.13) by first using the relationship [(A.,/ £,)] / [0/(0—1)] = ([(V £,)*A/CJ / [{0/(0—1)}-MCi\) = (/У ?/), where MCt is aggregate marginal cost, then substituting in (5.4).
where к, = \ph Apt, cM, jtM, ft-i]’. The solution thus expresses the endogenous variables in terms of predetermined endogenous variables k, and the exogenous processes z,.

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