Log-linearize no-arbitrage condition in a 2-country model


Hi there,

I would like to log-linearize the no-arbitrage condition between bonds and assets under capital adjustment costs (standard definition like in Boldrin, Christiano, and Fisher (1999)).


In steady state,

R_ss = Zss + (1-delta)

holds. Furthermore,

qss = 1; inflationSS = 1; a_3 = 1/0.24; a_1 = delta^(a_3); a_2 = delta - (a_1/(1-a_3))(delta)^(1-a_3);

I saw only examples with investment adjustment costs…
Without adjustment costs I have no difficulties to log-linearize the above expression.

In my solution, the adjustment cost term (derivative in the brackets) cancels out when I use Uhlig’s (1999) method. Is this possible?

Thank you very much for any kind of input…


Please use the \LaTeX capabilities to provide the solution you derived. That makes it easier to spot problems and does not require to start from scratch.


Thank you for your comment. In the attachment you find the pdf version of my question.

Annex_Models.pdf (136.0 KB)


Is there no paper available which log-linearizes capital adjustment costs? :thinking: I really need your advise … Many thanks!


See https://economics.ca//2007/papers/0207.pdf