The Composition of Government Spending and the Real Exchange Rate

GALSTYAN AND LANE

Appendix A: Benchmark Steady State

In the benchmark steady state, labor is distributed between the sectors according to

LT=—αL(¹ - ^γ∖ L

αL(1 γ) + β_Lγ

LN =

^βL Y L

^αL(¹ - Y)^{+ β}LY

The relative price of non-traded goods is

PN =

1 ¹-βL-βκ αZ βZ ∖¹-^βK

ηLN ^1-^βK Z ^1-ακ ^1-^βK

. K' ακ βκ -βi

where η = αLα_κ ^αK r ^1-^αK ^1-^βκ β^-1β_κ ^eK

Capital is distributed between the sectors as follows

{(KL L^αL Z ^αZ ^-~ αK1-ι

KT = T----

(A.1)

(A.2)

(A.3)

(A.4)

KN = P_N

1
^βK^-1

βκ lN^l Z^β^z ! ^βK^1-1

(A.5)

In the benchmark steady state, the levels of consumption of traded and nontraded
goods are equal to the respective outputs and are given by

CT = YT = Z^α^ZL_T^α^LK_T^α^K

(A.6)

CN = YN = Z^β^ZL^β_N^LK_N^β^K (A.7)

where we normalise AT = AN = 1 and we assume a zero depreciation rate such that the
steady state levels of private and public investment are zero.