International macroe.. - Free

9.1. THE REDUX MODEL 277ŷ ∗ (z ∗ )= 1"ĝw #1+θ 2 − θĈ∗ , (9.66)h(1 − n)(ĝ ∗ − ĝ)+rˆb i , (9.67)ˆp(z) − ˆP = 1 2θˆp ∗ (z ∗ ) − ˆP ∗ =n h(1 − n)(ĝ − ĝ ∗ ) − rˆb i . (9.68)(1 − n)2θFrom (9.62) and (9.63) you can see that a steady state transfer of wealthin the amount of B from the foreign country to the home country,raises home steady state consumption and lowers it abroad. The wealthtransfer reduces steady state home work effort (9.65) and raises foreignsteady state work effort (9.66). From (9.67), we see that this occursalong with ˆp(z) − ˆP >0 so that the relative price is high in the highwealth country. The underlying cause of the wealth redistribution hasnot yet been speciÞed. It could have been induced either by governmentspending shocks or monetary shocks.If the shock originates with an increase in home government consumption,∆G is spent on home and foreign goods which has a directeffect on home and foreign output. At home, however, higher governmentconsumption raises the domestic tax burden and this works toreduce domestic steady state consumption.The relative price of exports in terms of imports is called the termsof trade. To get the steady state change in the terms of trade, subtract(9.68) from (9.67), add S t to both sides and note that PPP impliesˆP − (Ŝ + ˆP ∗ )=0toget⇐(159)ˆp(z) − (Ŝ +ˆp∗ (z ∗ )) = 1 θ (ŷ∗ − ŷ) = 11+θ (Ĉ − Ĉ∗ ). (9.69)From (9.53) and (9.54), it follows that the steady state changes in ⇐(160)the price levels areˆP = ˆM − 1 Ĉ,²(9.70)ˆP ∗ = ˆM ∗ − 1 ² Ĉ∗ . (9.71)By PPP, (9.70), and (9.71) the long-run response of the exchange rateisŜ = ˆM − ˆM ∗ − 1 ² (Ĉ − Ĉ∗ ). (9.72)