The resulting spending decision rules take a forward-looking error correction form where current spending growth depends on its own lags (up to three), expected future growth in equilibrium spending, and (negatively) on the log difference between lagged spending and its equilibrium level. Exports and non-oil imports are specified as error-correction processes where equilibrium real exports are proportional to the ratio of foreign GDP to the real exchange rate, and equilibrium real imports are proportional to the product of domestic GDP and the real exchange rate. Uncovered interest rate parity determines the multilateral exchange rate up to a sovereign risk premium that moves with the net foreign asset position of the United States. read only

Aggregate Supply. In FM, MSR, and TAYMCM, the aggregate wage rate is determined by overlapping wage contracts. In particular, the aggregate wage is defined to be the weighted average of current and three lagged values of the contract wage rate. TAYMCM follows the specification in Taylor (1980), where the current nominal contract wage is determined as a weighted average of expected nominal contract wages, adjusted for the expected state of the economy, in effect during the life of the contract. FM and MSR use the specification due to Fuhrer and Moore (1995), where the real contract wageâ€”the contract wage deflated by the aggregate wage-is determined as a weighted average of expected real contract wages, adjusted for the expected level of the output gap, in effect over the life of the contract.

In FM and MSR, the aggregate price level is a constant markup over the aggregate wage rate. In contrast, the output price in TAYMCM takes the (backward-looking) error-correction formulation where current price inflation depends positively on its own lag, current wage inflation, and lagged import price inflation and negatively (with a relatively large coefficient of -0.2) on the lagged deviation of the log of the price level from its equilibrium value. Import prices error-correct slowly to an equilibrium level equal to a constant markup over a weighted average of foreign prices converted to dollars. This partial adjustment of import and output prices imparts slightly more persistence to output price inflation than would result from staggered nominal wages alone.

The resulting spending decision rules take a forward-looking error correction form where current spending growth depends on its own lags (up to three), expected future growth in equilibrium spending, and (negatively) on the log difference between lagged spending and its equilibrium level. Exports and non-oil imports are specified as error-correction processes where equilibrium real exports are proportional to the ratio of foreign GDP to the real exchange rate, and equilibrium real imports are proportional to the product of domestic GDP and the real exchange rate. Uncovered interest rate parity determines the multilateral exchange rate up to a sovereign risk premium that moves with the net foreign asset position of the United States. read only Aggregate Supply. In FM, MSR, and