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4.5. CALIBRATING THE LUCAS MODEL 129whenever it lies above its sample mean and in the low-growth stateotherwise. Then set high-growth states λ 1 , λ ∗ 1, g 1 ,andg1 ∗ to the averageof the high-growth rates found in the data. Similarly, assign the lowgrowthstates λ 2 , λ ∗ 2, g 2 ,andg2 ∗ to the average of the low-growth ratesfound in the data. Using per capita consumption and money data forthe US and Germany, and viewing the US as the home country, theestimates of the high and low state values areλ 1 =1.010—average US money growth good state,λ 2 =0.990—average US money growth bad state,λ ∗ 1 =1.011—average German money growth good state,λ ∗ 2 =0.991—average German money growth bad state,g 1 =1.009—average US consumption growth good state,g 2 =0.998—average US consumption growth bad state,g1 ∗ =1.012—average German consumption growth good state,g2 ∗ =0.993—average German consumption growth bad state.Now classify the data into the φ states according to whether the observationslie above or below the mean then set the transition probabilitiesp jk equal to the relative frequency of transitions from state φ j toφ k found in the data. The P estimated in this fashion, rounded to 2signiÞcant digits, is⎡⎢⎣.00 .00 .20 .00 .40 .00 .00 .00 .20 .00 .00 .00 .20 .00 .00 .00.20 .20 .20 .20 .00 .20 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00.17 .17 .00 .17 .17 .00 .00 .00 .00 .00 .00 .00 .00 .00 .17 .17.00 .00 .00 .00 .17 .00 .00 .00 .00 .17 .33 .17 .00 .00 .17 .00.08 .08 .08 .08 .15 .08 .08 .08 .15 .08 .08 .00 .00 .00 .00 .00.20 .00 .00 .00 .20 .00 .00 .00 .00 .00 .20 .00 .00 .20 .20 .00.00 .00 .00 .20 .40 .00 .00 .20 .00 .00 .00 .00 .20 .00 .00 .00.25 .00 .00 .00 .00 .50 .00 .00 .00 .00 .00 .00 .00 .00 .00 .25.00 .14 .00 .00 .00 .00 .14 .00 .14 .14 .00 .00 .00 .14 .14 .14.00 .00 .00 .00 .00 .00 .25 .00 .25 .00 .00 .25 .25 .00 .00 .00.00 .00 .20 .00 .20 .00 .00 .00 .20 .20 .00 .20 .00 .00 .00 .00.00 .25 .00 .25 .25 .00 .00 .00 .00 .00 .00 .00 .00 .25 .00 .00.00 .00 .00 .00 .13 .00 .00 .13 .13 .00 .13 .13 .25 .00 .13 .00.00 .00 .20 .00 .00 .00 .00 .00 .00 .00 .00 .00 .20 .00 .40 .20.00 .00 .00 .00 .25 .00 .25 .13 .00 .00 .00 .00 .13 .13 .00 .13.00 .00 .00 .20 .00 .20 .00 .00 .00 .00 .00 .00 .20 .20 .20 .00Results. We set the share of home goods in consumption to be θ =1/2,the coefficient of relative risk aversion to be γ =10,andthesubjective⎤⎥⎦