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280CHAPTER 9. THE NEW INTERNATIONAL MACROECONOMICSto solve for Ĉ − Ĉ∗ . Second, it must be the case that asset holdings immediatelyadjust to their new steady-state values, ˆb t = ˆb, becausewithone-period price stickiness, all variables must be at their new steadystate values at time t + 1. The extent of any current account imbalanceat t + 1 can only be due to steady-state debt service–not to changes inasset holdings. It follows that bond stocks determined at t which aretaken into t + 1 are already be at their steady state values. So, to getthe solution, start by subtracting (9.63) from (9.62) to getĈ − Ĉ∗ =(1 + θ)2θrˆb1 − n . (9.87)(167)⇒(168)⇒(169)⇒But ˆb/(1 − n) =ŷ t (z) − ŷt ∗ (z ∗ ) − Ŝt − (Ĉt − Ĉ∗ t ), which follows fromsubtracting (9.82) from (9.81) and noting that ˆb = ˆb t . In addition,ŷ t (z) − ŷt ∗ (z ∗ )=θŜt, which you get by subtracting (9.48) from (9.47),using PPP and noting that ˆp t (z) − ˆp ∗ t (z ∗ ) = 0. Now you can rewrite(9.87) asĈ − Ĉ∗ = (θ2 − 1)r(9.88)r(1 + θ)+2θŜt,and solve (9.85) and (9.88) to getŜ t =Ĉ t − Ĉ∗ t =²[r(1 + θ)+2θ]r(θ 2 − 1) + ²[r(1 + θ)+2θ] ( ˆM t − ˆM t ∗ ), (9.89)²[r(θ 2 − 1)]r(θ 2 − 1) + ²[r(1 + θ)+2θ] ( ˆM t − ˆM t ∗ ). (9.90)(170)⇒From (9.87) and (9.90), the solution for the current account isˆb =2θ²(1 − n)(θ − 1)r(θ 2 − 1) + ²[r(1 + θ)+2θ] ( ˆM t − ˆM ∗ t ). (9.91)(171)⇒(9.83), (9.90) and (9.69) together give the steady state terms of trade,ˆp(z) − ˆp ∗ (z ∗ ) − Ŝ = ²r(θ − 1)r(θ 2 − 1) + ²[r(1 + θ)+2θ] ( ˆM t − ˆM t ∗ ). (9.92)We can now see that money is not neutral since in (9.92) the monetaryshock generates a long-run change in the terms of trade. A domestic