Appendix to: The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models

where β is a discount factor, ξt is a country specific vector of shocks to the household’s preferences, Ct denotes household consumption of a composite consumption good, Lt(x) denotes the households’ supply of differentiated labor input x. The function u(Ct) is increasing and concave while v(Lt(x), ξt) is increasing and convex in Lt(x). There are an equal (large) number of households of each type x. The consumption index in equation (1) is