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292CHAPTER 9. THE NEW INTERNATIONAL MACROECONOMICSGovernment.seignorageGovernment spending is Þnanced by tax receipts andP t G t = P t T t + M t − M t−1 , (9.134)Pt ∗ t = P t ∗ t ∗ t ∗ − M t−1 ∗ . (9.135)In characterizing the equilibrium, it will help to consolidate the individual’sand government’s budget constraints. Substitute proÞts (9.122)-(9.123) and the government budget constraints (9.134)-(9.135) into thehousehold budget constraints (9.110)-(9.111) and use the zero-net supplyconstraint B ∗ t = −(n/(1 − n))B t from (9.137) to getP t C t + P t G t + δ t B t = p t (z)x t (z)+S t q ∗ t (z)v t(z)+B t−1 , (9.136)P ∗t C ∗ t + P ∗t G ∗ t −n δ t B t= p ∗ t (z ∗ )x ∗ t (z ∗ )+ q t(z ∗ )vt ∗ (z ∗ ) − n1 − n S t S tB t−1S t.1 − n(9.137)The equilibrium is characterized by the Euler equations (9.112)—(9.117),the consolidated budget constraints (9.136) and (9.137) with B 0 = G 0 =G ∗ 0 = 0, and the output equations (9.128)—(9.133).From this point on we will consider only on monetary shocks. Tosimplify the algebra, set G t = G ∗ t =0forallt. We employ the samesolution technique as we used in the Redux model. First, solve forthe 0-steady state with zero-international debt and zero-governmentspending, then take a log-linear approximation around that benchmarksteady state.(189)⇒The 0-steady state. The 0-steady state under pricing-to-market isidentical to that in the redux model. Set G 0 = G ∗ 0 = B 0 = 0. Dollarprices of z and z ∗ goods sold at home are identical, p 0 (z) =q 0 (z ∗ ).From the markup rules (9.124) and (9.125), it follows that the law ofone price, p 0 (z) =q 0 (z ∗ )=S 0 q0(z) ∗ =S 0 p ∗ 0(z ∗ ). We also have by PPPP 0 = S 0 P0 ∗ . (9.138)Steady state hours of work, output, and consumption are" # 1/2θ − 1h 0 (z) =y 0 (z) =h ∗ 0(z ∗ )=y0(z ∗ ∗ )=C 0 = C0 ∗ = . (9.139)ρθ
9.2. PRICING TO MARKET 293Table 9.2: Notation for the pricing-to-market modelp t (z)qt ∗(z)p ∗ t (z ∗ )q t (z ∗ )y t (z)x t (z)v t (z)yt ∗ (z ∗ )x ∗ t (z ∗ )vt ∗ (z ∗ )π t (z)πt ∗ (z ∗ )h t (z)h ∗ t (z ∗ )B tBt∗i tδ tW tWt∗G tG ∗ tT tTt∗C tCt∗P tPt∗S tdollar price of home good z in home country.euro price of home good z in foreign country.euro price of foreign good z ∗ in foreign country.dollar price of foreign good z ∗ in home country.home goods output.home goods sold at home.home goods sold in foreign country.foreign goods output.foreign goods sold in foreign country.foreign goods sold in home country.Domestic Þrm proÞts.Foreign Þrm proÞts.Hours worked by domestic individual.Hours worked by foreign individual.Dollar value of nominal bond held by domestic individual.Dollar value of nominal bond held by foreign individual.Nominal interest rate.Nominal price of the nominal bond.Nominal wage in dollars.Nominal wage in euros.Home government spending.Foreign government spending.Home government lump-sum tax receipts.Foreign government lump-sum tax receipts.Home CES consumption index.Foreign CES consumption index.Home CES price index.Foreign CES price index.Nominal exchange rate.
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To Shirley, Laurie, and Leslii
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CONTENTSvii11 Balance of Payments C
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2 CHAPTER 1. SOME INSTITUTIONAL BAC
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10 CHAPTER 1. SOME INSTITUTIONAL BA
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80 CHAPTER 3. THE MONETARY MODEL3.1
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82 CHAPTER 3. THE MONETARY MODEL604
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84 CHAPTER 3. THE MONETARY MODEL0 <
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86 CHAPTER 3. THE MONETARY MODELexc
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90 CHAPTER 3. THE MONETARY MODELThe
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92 CHAPTER 3. THE MONETARY MODEL=
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96 CHAPTER 3. THE MONETARY MODELTab
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102 CHAPTER 3. THE MONETARY MODELMo
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104 CHAPTER 3. THE MONETARY MODELwh
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106 CHAPTER 4. THE LUCAS MODEL(76)
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108 CHAPTER 4. THE LUCAS MODELsubje
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110 CHAPTER 4. THE LUCAS MODELeach
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112 CHAPTER 4. THE LUCAS MODELcompl
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116 CHAPTER 4. THE LUCAS MODELc yt
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120 CHAPTER 4. THE LUCAS MODELn t =
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122 CHAPTER 4. THE LUCAS MODELRearr
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124 CHAPTER 4. THE LUCAS MODELTable
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126 CHAPTER 4. THE LUCAS MODEL4.5 C
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128 CHAPTER 4. THE LUCAS MODELTable
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130 CHAPTER 4. THE LUCAS MODELdisco
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132 CHAPTER 4. THE LUCAS MODEL1.02A
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134 CHAPTER 4. THE LUCAS MODELAppen
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136 CHAPTER 4. THE LUCAS MODELProbl
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138 CHAPTER 5. INTERNATIONAL REAL B
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162CHAPTER 6. FOREIGN EXCHANGE MARK
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208 CHAPTER 7. THE REAL EXCHANGE RA
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230 CHAPTER 8. THE MUNDELL-FLEMING
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342 CHAPTER 11. BALANCE OF PAYMENTS
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358 AUTHOR INDEXFama, E.F., 161, 16
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Subject IndexAAbsorption, 16, 230AI
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362 SUBJECT INDEXEfficient capital
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364 SUBJECT INDEXMethod of undeterm
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366 SUBJECT INDEXRisk neutrality, 9
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368 SUBJECT INDEXImpulse response a
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