Exercise 9.9

Trend Growth

⬅ Return

Problem

Continue to assume, as in exercise 9.8, that the foreign price of tradables grows at the rate \(\pi^*\). In addition, assume that the production of nontradables is given by \(Y^N_t = X_t F(h_t)\) and that the endowment of tradables is given by \(Y^T_t=X_t y^T_t\), where \(X_t\) is a deterministic trend that grows at the gross rate \(g\), that is, \(X_{t+1}/X_t=g\). Again, show how equilibrium conditions (9.9)-(9.19) are modified by the imposition of this assumption. Hint: As in the model of Chapter 5, you will have to transform some variables appropriately to make them stationary. The equilibrium conditions should include only stationary variables.

Answer

No solution has been posted yet. If you have a solution, we invite you to share it in the comment box at the bottom of this page.