Hi all,
I’m looking at an early version of Justiniano and Preston’s paper “Monetary Policy and uncertainty in an empirical small open economy”, found here: https://docuri.com/download/bruceprestonseminar1705_59c1cb78f581710b28610f07_pdf
The optimization problems for domestic and foreign households both contain preference shocks - but in a log-linearized equation following from the assumption of identical preferences in domestic and foreign households (eq.4 and eq.17), only the preference shock of domestic households prevails.
Is there any specific reason for this; should one avoid having different shocks in the same equation?
I would really appreciate it if anyone could please explain this for me.
Cheers,