Exchange rate dynamics, asset market structure and the role of the ...

x H
y H
= ' x
y H
(B2)
x H
y H
= ' x
y H
(B3)
y H
c H
= 1 v (1
x H
y H
) 1
(B4)
c H
y H
= 1
c H
y H
x H
y H
x H
y H
(B5)
x F
y F
1 i +
=
(1 )
(B6)
x F
y = (1 ' ) x F
y F
(B7)
y F
c F
=
x F
y = (1 ') x F
y F
1
1
(1 v )
x 1
t
y
(B8)
(B9)
c F
y = 1
c F
y
x F
y
x F
y
(B10)
C
The link between relative output and the terms of
trade
To derive expression (35), I take expression (A21) and (A22), setting the share of investment
goods in home-country to zero and substituting expressions (A25) -(A28), for convenience I
also assume ‘symmetric home bias’v = 1 v :
^y H;t = v(1 v) ^T t + v ^C t + v(1 v) ^T t + (1 v) ^C t
35