- 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
