Dear Johannes and other scholars,

First thank you very much for your previous guidance, I am grateful.

I am currently formulating a two-country DSGE model and involves net exports appearing in observation equation, net exports=Country A’s export to country B-Country A’s import from country B*exchange rate,

I assume that country A has a trend growth rate g_A, country B has a trend growth rate g_B,

For country A’s output appearing in observation equation, I write:

obs_{yA}=yA_{t}-yA_{t-1}+g_{A}

For country B’s output appearing in observation equation, I write:

obs_{yB}=yB_{t}-yB_{t-1}+g_{B}

where obs_{yA} is observed output for country A, obs_{yB} is observed output for country B, yA_{t} and yB_{t} are log-differenced state variables for country A and B respectively

- Question 1, I have no idea about the trend for net exports, it should neither be g_{A} nor g_{B} right?

Should the trend for net exports apearing in observation equation be g_{A}-g_{B}? - Question 2, For echange rate entering as observable variable, should it be log-differenced or not?
- Question 3. exchange rate X has no trend in observation equation right?

can the observation equation for exchange rate be obs_x=x_{t} or obs_x=x_{t}-x_{t-1}?

where obs_x is observable variable for exchange rate, x_{t} is log-differenced state variable for exchange rate

Thank you very much and look forward to hearing from you.

Jesse

PhD Candidate