Goods producing Örm.

  1. Consider two large open economies, Home and Foreign (foreign variables that need not
    be equal to Home variables are denoted by an asterisk. Each economy is inhabited by
    a continuum of identical individuals grouped into an aggregate risk sharing household.
    In each country there is also a representative Önal goods producing Örm. Lifetime
    utility is given by:
    U = Et
    X1
    t=0

    t
    ln Ct and U
    = Et
    X1
    t=0

    t
    ln C

t
,
where: Et
is the expectation operator, 2 (0; 1) is the (constant) subjective discount
factor, and C and C
denote consumption. Production in each country is determined
by:
Yt = AtK
t and Y

t = A

t K
t
,
1

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