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284CHAPTER 9. THE NEW INTERNATIONAL MACROECONOMICSNow substituting these results back into (9.100) gives∆Ut c + ∆Ut y = (1 − à ! n)r(θ2 − 1)θ − 1 hθ(1 iŜ t +r(1 + θ)+2θĈw t −− n) Ŝ t +θĈw t+ β"r(1 − n)(θ 2 #− 1)Ŝ t(1 − β) r(1 + θ)+2θà !à !β θ − 1 rθ(1 − n)(θ − 1)+Ŝ t . (9.105)1 − β θ r(1 + θ)+2θ(180)⇒After collecting terms, the coefficient on Ŝt is seen to be 0. Substitutingr =(1− β)/β, youareleftwith∆U c t + ∆U y t= Ĉw tθ= −(1 − β)ˆr tθ=Ãβ + ²(1 − β)θ!ˆM w t > 0, (9.106)where the Þrst equality uses (9.93) and the second equality uses (9.94).Due to the extensive symmetry built into the model, the solutionsfor the foreign variables Ĉ∗ , Ĉ∗ t , ŷ ∗ , ŷt∗ are given by the same formulaederived for the home country except that (1 − n) is replaced with −n.It follows that the effect on ∆Utc∗ + ∆Ut y∗is identical to (9.106).One of the striking predictions of Redux is that the exchange rateeffects have no effect on welfare. All that is left of the monetary shockis the liquidity effect. The traditional terms of trade and current accounteffects that typically form the focus of international transmissionanalysis are of second order of importance in Redux. The reason is thatin the presence of sticky nominal prices, the monetary shock generatesa surprise depreciation and lowers the price level to foreigners. Homeproducers produce and sell more output but they also have to workharder which means less leisure. These two effects offset each other.The monetary expansion is positively transmitted abroad as it raisesthe leisure and consumption components of welfare by equal amountsin the two countries. Due to the monopoly distortion, Þrms set priceabove marginal cost, which leads to a level of output that is less than thesocially optimal level. The monetary expansion generates higher outputin the short run which moves both economies closer to the efficientfrontier. The expenditure switching effects of exchange rate ßuctuations