Master Thesis - Humboldt-Universität zu Berlin

4.5 Government
For simplicity, we abstain from government issue of debt, so that the government
consumption is entirely financed by taxes less transfers. Given that
the model has no features to break Ricardian equivalence, this simplification
has no impact on the results:
G t = T t − T R t (24)
where T R t has the interpretation of a budget deficit (we follow Baxter and
King (1993), ). Consequently, there is no government debt. Government
expenditure is modelled as an exogenous variable equal to 0 in the steady
state: G t = ɛ G t = ρ G ɛ G t−1 + ηt G , with ηt G an i.i.d. - Normal error term.
Government tax revenues can be summarize as:
T t = τ c t C t + τ l tL t w t + τ k t (r k t − δ) ˜K t (25)
4.6 Balance of Payments
We use the definition of trade balance to write the balance of payments
condition:
1
R e t
Bt
τ∗
− Bτ∗ t−1
= X
Pt C S t Pt C t − P t
M
S t Pt
D
M t −
P o
t
S t P D
t
O t (26)
The current account relationship determines the accumulation of foreign assets
B ∗ t :
CA t = 1 R e t
Bt
τ∗
− 1 Bt−1
τ∗
(27)
Pt C S t Rt−1
e Pt C S t
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