Plugging in (35) the expression of τt given by (36), and plugging (36) in (37), we obtain
a system of two equations,
kt+1
lβ (1 — a )
(1 + β )(1 — Qt)
(38)
ltt+1
(1 — Qt+1) Akα+1
[(1 + ρ )(1 + β )]1 - - Ttkq (1 — t) )1 - -
1 -~- q a— 1^—
a1 -σ q- - kt+1 -
(39)
Using (36) and (38) to rearrange the expression (39), we obtain a system equivalent to
(35)-(37):
kt+1
lβ (1 — a )
(1 + β )(1 — Qt )
(40)
qt+1 qt1
-σ
)++1 g--σ l[(1+ β)(1 — t,)]α
1 — Qt+1 A[ lβ (1 — a )] a
(41)
((1 — tt ) a+aka —l (1 -qt Α1-σ+a )
t^∣√1 l ∖ < l l /QM —— l lβ (1 -a ) Aa 1
a 1 -- [(1 + P)(1 + β)] 1 -- 1. β )
Then we take a first-order Taylor expansion around the steady state. To compute the
partial derivatives of qt+1 with respect to kt and qt , we use the implicit function theorem.
Given the function F (qt+1, kt, qt) = 0, with
F( tt+1 ,kt,Qt ) = tt+ι tt1 -
-
qt +1 qt - l[(1+ β)(1 —qt)]α
1 — qt+1 A [ lβ (1 — a )]α
(1 — qt ) σ + αkα-
I (1 -qt )1-σ + α
A
1 — 1
a1 -- [(1+ρ)(1+ β)]1 --
lβ (1 — a )
1+β
41
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