Master Thesis - Humboldt-Universität zu Berlin

M T t = M t + O t (17)
Non-oil imported goods M t enter the final good production process at two
levels. First, indirectly, as inputs of the domestically produced intermediate
goods y j t and secondly as the main input M f t used to produce the importedand-distributed
goods. Therefore, total non-oil imports are given by:
M t = M p t + M f t (18)
Non-oil imported goods are provided by a continuum of importing firms
indexed by l, with l=[0, 1]. Importers for the euro area produce an homogeneous
good by combining fixed shares of the exported final goods from
the two other economies, i.e. the US and the Rest of the World. These importing
firms then differentiate it, e.g. by brand naming. The differentiated
good they produce m l t is sold on the euro area market at price P M,l
t . It is
assumed that importers can set optimally their price according to a random
Calvo process with probability 1 − ξ m . The share m of the importers who
cannot optimise their price index to the previous period inflation rate in the
imported price.
Assuming that the differentiated import goods are combined through a CES
technology, we have:
and the demand faced by each importing firm is:
[∫ 1
] 1+λm
M t = (m l 1
1+λm
t)
(19)
0
m l t = M t
(
) −
P M,l
1+λm
λm
t
Pt
M
(20)
15