Posted: March 10th, 2016

Derive this expression (equation (27) in Gali’s paper, notice that it should have −ρ on the LHS)

In this model, the nominal interest rate (notice that in this paper it is denoted by rt and not it as in the class notes) can be written in the following way: rt −ρ = σ−1 1 + η! ∞ X k=1 η 1 + η!k−1 Et{∆yt+k}+ ρm 1 + η (1−ρm) ∆mt Derive this expression (equation (27) in Gali’s paper, notice that it should have −ρ on the LHS). (30 marks)