Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules



A. Appendix


Analogously, one gets for CF equation (13):

Cf = (1 - n) Ppψ-  C.

Plugging these two equations into the definition of C, one gets:

C=


n                     1-n

P C ' P C


nn(1 - n)1-n


=(P)' P


C.


Solving this forP , one finally obtains equation (5):

=PHnPF1-

Consumption-based Producer Price Index, Demand Curves for Individual Goods The representative
domestic household maximizes

CH=


1

n^θθ г


θ-1

C ( h ) ~s~ dh


θ- 1


with respect to C(h) subject to the budget constraint

n

H CH =
0


(h)C(h)dh.


Hence,

Λ=


1

(;)θ


n / θ-1

I с ( h) -τ- dh
0


θ
θ-1


λ nP (h)C(h)dh -PH CH

0


max
C(h)


Λ


∂C ( h)


ɑ)' Г C ( h )


θ- 1

θ dh


1
θ- 1


1

(1) β C ( h ) -1 - λΡ ( h ) = 0


Solving this expression for C (h), one obtains the subsequent preliminary demand function for individual
domestic goods:

{x -θ

---------λ---ɪ---(

[( 1 )1 ;; C ( h )θ- dhθ-1 ( n ) »

Multiplying the preceding equation with Ρ (h), one obtains:

{4 -θ

---------λ---ɪ---(

[( 1 )θ RO C ( h ) θ^ dh]θ-1 ( 1 ) »

Taking the integral from 0 to n over both sides of this equation, one gets:

-θ

n Ρ (h)C (h)dh = n Ρ (h)1 dh
00

[( n )1 RO C( h )θ-1 dhiθ-1 ( n )1

29




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