I have some questions about manipulations of debt elastic risk premium（as in Schmitt-Grohe and Ubire, 2003）.
I’m modeling an open economy new keynesian model with incomplete financial markets. And I use a debt elastic risk premium as in SUG, 2003.
But in previous studies, there are some types of this formula.
Which is a correct formula? Please see a following file.
How do I log-linearize this equation?
Simply, risk=ψb , right?
Thank you for any advices.