Survey_FM_2004

Abstract

The world economy consists of two countries, that we label them Home and Foreign. Each economy is populated by infinite-lived agents, whose total measure is normalized to unity. We assume the existence of complete markets for state-contingent money claims expressed in units of domestic currency. s. At the beginning of time t the households receive a nominal labor income of WtNt. To insure their consumption pattern against random shocks at time t they decide to spend ?t+1,tBt+1 in nominal state contingent securities where ?t,t+1 ? ?(st+1|st) is the pricing kernel of the state contingent portfolio. Each state contingent asset Bt+1 pays one unit of domestic currency at time t + 1 and in state st+1.