Nemo Complete Documentation 2017

A complete documentation of Norges
Bank’s policy model NEMO

ERLING M. KRAVIK AND
KENNETH S. PAULSEN
A complete documentation of
Norges Bank’s policy model NEMO1
Erling M. Kravik2 and Kenneth S. Paulsen2
September 20, 2017
1
This paper should not be reported as representing the views of Norges Bank. The views expressed are those of the authors and
do not necessarily re‡ect those of Norges Bank. We thank Karsten R. Gerdrup, Tuva M. Fastbø and Tobias Ingebrigtsen for useful
comments.
2
Please report typos and errors to erling.kravik@norges-bank.no or kenneth.paulsen@norges-bank.no.
Abstract
This paper documents the theoretical structure and all derivations of the current version of Norges Bank’s policy model
Norwegian Economy Model (NEMO). The model consists of households, …rms, a new and explicit treatment of the oil sector,
a credit market (including a separate banking sector), a housing sector and a foreign sector. Monetary policy works through
a standard Taylor rule or by minimizing a loss function. We set up all maximation problems, derive the …rst order conditions
and show how the variables are made stationary. We list all shocks to the model, derive the steady-state solution, and lastly,
we provide the full parametrization of the model (excluding the monetary policy parameters).
Contents
1 Introduction 4
1.1 Syntax and notation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2 Households 4
2.1 Maximization problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Making the equations stationary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2.1 The in-period utility functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2.2 First-order conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2.3 The constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2.4 Equations included in the model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 Steady-state equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3.1 The in-period utility functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3.3 The constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3 Intermediate goods sector 11

3.2.1 De…nitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.2.2 Demand equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4 Final goods sector 16

4.1 Cost minimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5 Entrepreneurs 18
5.2.2 De…nitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.2.3 The constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.3.2 De…nitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.3.3 Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6 Capital producer 21
7 Housing producer 22
1
8 Banking sector 24
8.1.1 Wholesale branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.1.2 Loan branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.1.3 Deposit branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.1.4 Balance sheet for the bank sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.2.2 Loan branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.2.3 Deposit branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.2.4 Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.3.2 Loan branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.3.3 Deposit branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.3.4 Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9 Oil sector 30
9.1 Maximization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.1.1 Supply …rms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.1.2 Extraction …rm, domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.1.3 Extraction …rm, abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9.1.4 Oil fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.2.1 Supply …rms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.2.2 Extraction …rms, domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.2.3 Producer of rigs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.2.4 Extraction …rm abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.2.5 Oil fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.3.1 Supply …rms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.3.2 Extraction …rms, domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.3.3 Producer of rigs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.3.4 Oil price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.3.5 Extraction …rms abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.3.6 Oil fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10 Foreign sector 37
10.1 Equations included in the model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11 Market clearing 38
12 Monetary policy 39
13 Extra de…nitions 40
13.1 Interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
13.2 Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
13.3 Variables in CPI units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
13.4 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
14 Measurement equations 42
15 Shock processes 43
16 The steady-state solution of the model 46

16.1 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
16.2 Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
2
17 List of all parameters 56
3
1 Introduction
This paper documents the theoretical structure and all derivations of the current version of Norges Bank’s DSGE policy
model NEMO.1 Compared to earlier versions, the model now features an oil sector with pro…t-maximizing agents and a
block-exogenous foreign sector. As with earlier versions of NEMO, the model includes an explicit treatment of the credit
market, including a separate banking sector and a role for housing services and house prices. Monetary policy works either
via a standard Taylor rule or through optimal monetary policy (i.e. minimizing an operational loss function). The DSGE
literature is large and NEMO builds on numerous di¤erent sources. Key references are listed at the end.
1.1 Syntax and notation

Throughout this document, PtX denotes the nominal price of real variable X in period t: The consumption good is the
numeraire and has the price Pt . WX;t is the nominal wage rate in sector X: Moreover, RtX 1 + rtX is the "gross interest
X
rate" associated with sector or variable X; where rt is the interest rate. All other variables are expressed in real terms
unless otherwise stated.
There is exogenous labor augmenting technological growth in the intermediate sector which causes the economy to grow
at rate zt Zt =Zt 1 . We let Xet indicate the stationary form of Xt . Hence, for consumption, C
et Ct
Zt : The housing sector is
h
z h
assumed to have a weaker technology growth rate of t = t , where t h h h e t Ht t :2 We use the notation
Zt =Zt 1 , hence H
Z
Zt
Xss for variable X in steady-state.
2 Households
Each household supplies a di¤erentiated labor input to intermediate …rms and the oil supply sector. Wages are set by the
households under the assumption of monopolistic competition. Households obtain utility from consumption, leisure, housing
services and deposits. Direct utility from deposits ensures that households are both gross lenders and gross borrowers
(alternatively, we could have modeled two di¤erent types of households: savers and spenders). Preferences are additively
separable. We have also seperated the households problem into two maximization problems: that of the households and that
of the entrepreneurs. We do this to simplify the maximization problem and to clearify the decisionmaking by the housholds
in the model. The entrepreneurs’part of the problem is covered in section 5.
2.1 Maximization problem

Lifetime expected utility of household j at time s can be represented as
1
X
t s
Us (j) = Es [u (Ct (j)) + d(Dt (j)) + w(Ht (j)) v(Lt (j))] , (1)
t=s
where is the discount factor, Ct denotes consumption, Dt is deposits, Ht is housing stock and Lt is supply labor. The
in-period utility functions are de…ned as:
Ct (j) bc Ct 1
u (Ct (j)) = ztu (1 bc = z
ss ) ln , (2)
1 bc = zss
Dt (j) bd Dt 1
d (Dt (j)) = ztd 1 bd = z
ss ln ,
1 bd = zss
1+
1 bl Lt (j) bl Lt 1
v (Lt (j)) = ,
1+ 1 bl
Ht (j) bh Ht 1
w(Ht (j)) = zth 1 bh h z
ss = ss ln ,
1 bh hss = zss
where the small letter z’s are random preference shocks that follow AR processes (a list of all shocks can be found in
chapter 15). The b parameters govern habit persistence and the zss denotes the exogenous steady-state (labor augmenting)
technology growth rate (i.e. zt = Zt =Zt 1 ). The housing sector is assumed to have a weaker technology growth rate of
z h h
t = t , where t Zth =Zth 1 , which is equal to hss = zss in steady-state. The degree of disutility of supplying labor is captured
by the parameter > 0. As seen from 2 we assume a log in-period utility function for consumption, which means that we
assume that the intertemporal elasticity of substitution is equal to 1. This is to secure a balanced growth path.
1 Please note that this document is continuously revised, and changes to the model will be documented in updated versions.
z
2 The relative growth rate of the housing sector to the economy’s growth rate is t
= z= 1 : The relative growth rate of house prices to consumer
h t h
t t
prices is h:
t
4
The household’s budget constraint is:
B
Pt Ct (j) + Pt Dt (j) + PtH Ht (j) + rtF 1 + t (j) Pt 1 Bh;t 1 (j)
Wt (j)Lt (j) [1 t (j)] + Pt IB;t (j) + Rtd 1 Pt 1 Dt 1 (j) (3)
H
+ 1 PtH Ht 1 (j) + DIVt (j) T AXt (j) ,
where Pt is the price level of …nal goods, PtH is the price level of the housing stock, rtF is the nominal net mortgage interest
rate faced by households, Rtd is the gross interest on household’s deposits, B (j) denotes household j’s amortization rate
(loan repayment share), Bh;t (j) is real household’s borrowing, Wt (j) is the nominal wage rate (in both the intermediate
sector and the oil sector) set by household j, t (j) is wage adjustment costs (de…ned below in (8)), Lt (j) is the total amount
of hours worked (in both the intermediate sector and the oil sector), IB;t (j) indicates new real loans by household j, H
denotes depreciation of the housing stock and DIVt (j) and T AXt (j) are dividends (in nominal terms) payed out to the
household and taxes payed by the household, respectively.
Household’s borrowing process:
B Pt 1
Bh;t (j) = 1 t (j) Bh;t 1 (j) + IB;t (j) . (4)
Pt
Loan installments (repayments) are assumed to follow from an (approximated) annuity loan repayment formula3 :
h
B IB;t (j) B IB;t (j) h
h
t+1 (j) = 1 t (j) + 1 , (5)

Bh;t (j) Bh;t (j)
where h and h are exogenous parameters. If h is 0, we have that B t+1 (j) = 1 for all t, i.e. Bh;t (j) = IB;t (j), but if
h
> 0, the above repayment formula captures that the amortization rate is low during the …rst years of a mortgage, when
interest payments are high, and thereafter increasing.
Household j’s new loans are constrained by a relationship between the expected value of the household’s housing stock
in the next period and household j’s mortgage (assumed to hold with equality):
H
Pt+1 Pt+1
IB;t (j) = t Et Ht (j) Bh;t (j) , (6)
Pt+1 Pt
where t governs the constraint on new loans and is a shock and assumed to follow an AR process. See (486) for the
relationship with the loan-to-value ratio. Household j faces the following labor demand curve (see derivation in the section
on the intermediate goods sector, (60)):
Wt (j) t
Lt (j) = Lt , (7)
Wt
where Wt is the wage rate and t is the elasticity of substitution between di¤erentiated labor (and is assumed to follow an
AR process). We further assume that there is sluggish wage adjustment due to resource costs that are measured in terms of
the total wage bill. Wage adjustments costs are speci…ed as
W 2
Wt (j) =Wt 1 (j)
t (j) 1 . (8)
2 Wt 1 =Wt 2
As can be seen from (8), costs are related to changes in wage in‡ation relative to the past observed rate for households. The
parameter W > 0 determines how costly it is to change the wage in‡ation rate. To obtain an easier expression to maximize,
some algebra is required. Combining (4) and (6) yields:
B
1 t (j) Pt 1 H
Pt+1 Pt+1
t
Bh;t (j) = Bh;t 1 (j) + Et Ht (j) . (9)
1+ t Pt 1+ t Pt+1 Pt
Similarly, combining (5) and (4) gives
3 See reference #[13], Gelain et.al (2014b)
5
0 Pt 1
1
B
Bh;t (j) 1 t (j) Pt Bh;t 1 (j) h
B
t+1 (j) = @1 A B
t (j)
Bh;t (j)
B Pt 1
Bh;t (j) 1 t (j) Pt Bh;t 1 (j) h
h
+ 1
Bh;t (j)
,
h
B B Pt 1 Bh;t 1 (j) B h
h
h
h
t+1 (j) = 1 t (j) t (j) 1 + 1 . (10)

Pt Bh;t (j)
Maximizing (1) by substituting in for Ct from the budget constraint and subject to the constraints in (9) and (10) (and
also substituting in for ItB (j) from (4) into the budget constraint, while de…ning RF 1 + rF , gives rise to the following
Lagrangian:
n o
L( Wt ; Dt ; Bh;t ; Ht ; B
t )=
2 0 1 3
Wt (j)
Pt Lt (j) [1 t (j)]
6 B C 7
6 B +Bh;t (j) + Rtd 1 PPt 1 Dt 1 (j) C 7
6 B t C 7
6 B + 1 H Pt
H
C 7
6 uB Pt Ht 1 (j) C 7
6 B C 7
6 B + DIV t (j) T AXt (j)
Dt (j) C 7
1
X 6 @ Pt Pt A 7
t s6 PtH 7
Es 6 (j) RtF 1 PPt t 1 Bh;t 1 (j)
Pt Ht
7, (11)
6 7
t=s 6 +d(Dt (j)) + w(Ht (j)) v(Lt (j)) 7
6 h H i 7
6 B
Pt 1 (1 t (j)) P Pt+1 7
6 ! t Bh;t (j) Bh;t 1 (j) 1+t Et Pt+1 H (j) 7
6 Pt 1+ t t+1 Pt
t
t 7
6 7
4 B B Pt 1 Bh;t 1 (j) B
h
h
h
h
h 5
t t+1 (j) 1 t (j) Pt Bh;t (j) t (j) 1 1
where ! t is the Lagrangian multiplier associated with the borrowing constraint (9) and t is the Lagrangian multiplier
associated with the repayment constraint (10). FOC (supressing index j)
w.r.t. Bh;t
Pt
u0 (Ct ) Et u0 (Ct+1 ) RtF !t
Pt+1
" #
B h
Pt (1 t+1 ) Bh;t 1 Pt 1 B B h h
+Et ! t+1 t 2 (1 t ) t (1 )
Pt+1 1 + t+1 Bh;t Pt
h
Pt B B h h
+Et t+1 (1 t+1 ) t+1 (1 ) =0
Pt+1 Bh;t+1
(12)
Bh;t
,j
u0 (Ct )
(13)
0
u (Ct+1 ) Pt !t
Bh;t RtF
Bh;t Et Bh;t
u0 (Ct ) Pt+1 u0 (Ct )
" #
B h
! t+1 u0 (Ct+1 ) Pt (1 t+1 ) t Bh;t 1 Pt 1 B B h h
+Et 0 0
Bh;t 0
(1 t ) t (1 ) (14)
u (Ct+1 ) u (Ct ) Pt+1 1 + t+1 u (Ct ) Bh;t Pt
h
t+1u0 (Ct+1 ) Pt Bh;t B B h h
+Et (1 t+1 ) t+1 (1 ) = 0;
u (Ct+1 ) u0 (Ct ) Pt+1 Bh;t+1
0
6
w.r.t. Dt
Pt
u0 (Ct ) + Et u0 (Ct+1 ) Rtd + d0 (Dt ) = 0
Pt+1
,
0
u (Ct+1 ) Pt d0 (Dt )
Et Rtd = 1 (15)
u0 (Ct ) Pt+1 u0 (Ct )
w.r.t. Ht :
H H
PtH H Pt+1 t Pt+1 Pt+1
u0 (Ct ) + Et 1 u0 (Ct+1 ) + w0 (Ht ) + Et ! t =0
Pt Pt+1 1+ t t+1 Pt
P
,
0 H H
w (Ht ) PtH H
0
u (Ct+1 ) Pt+1 !t t Pt+1 Pt+1
= 1 Et Et ; (16)
u0 (Ct ) Pt u0 (Ct ) Pt+1 0
u (Ct ) 1 + t Pt+1 Pt
B
w.r.t. t
h h
Bh;t 1 Pt 1 1 h Bh;t Pt 1
h B B B h 1
t 1+ t t (1 t ) t + (1 ) !t = 0; (17)
Bh;t Pt 1+ t Pt
w.r.t. Wt (recall (8))
Lt Lt Wt Lt Wt
v 0 (Lt ) + u0 (Ct ) + (1 t) Lt t
Wt Pt Pt Wt Pt Wt
Wt+1
Et u0 (Ct+1 ) Lt+1 t+1 = 0
Pt+1 Wt
,
Lt Lt Wt W Wt =Wt 1 1=Wt 1
v 0 (Lt ) t + u0 (Ct ) (1 t ) (1 t) Lt 1
Wt Pt Pt Wt 1 =Wt 2 Wt 1 =Wt 2
" #
2
Wt+1 Wt+1 =Wt Wt+1 1
+Et u0 (Ct+1 ) Lt+1 W 1 =0
Pt+1 Wt =Wt 1 Wt =Wt 1 Wt
,
0
v (Lt ) Pt W Wt =Wt 1 Wt =Wt 1
t = ( t 1) (1 t) + 1
u0 (Ct ) Wt Wt 1 =Wt 2 Wt 1 =Wt 2
u0 (Ct+1 ) Pt Lt+1 W Wt+1 =Wt (Wt+1 =Wt )2
Et 1 ; (18)
u0 (Ct ) Pt+1 Lt Wt =Wt 1 Wt =Wt 1
where we have used that in symmetric equilibrium all households will set the same wage rate, hence: Wt (j) = Wt for all j,
2 1 31 1 2 1 31 1
Z t Z t
R1
so Wt = 4 Wt (j) 1 t dj 5 = 4 Wt 1 t dj 5 = Wt 0 1dj = Wt = Wt (j) and
0 0
( t +1)
Lt (j) Wt (j) Lt Lt (j) Lt
= t ) = t :
Wt (j) Wt Wt in sym m etric eq (W (j)=W ) Wt (j) Wt
We have also used that
t (j) W Wt (j) =Wt 1 (j) 1=Wt 1 (j)

= 1 ;
Wt Wt 1 =Wt 2 Wt 1 =Wt 2
2
t+1 (j) W Wt+1 (j) =Wt (j) Wt+1 (j) 1
= 1 :
Wt (j) Wt =Wt 1 Wt =Wt 1 Wt (j)
7
2.2 Making the equations stationary
2.2.1 The in-period utility functions
h i h i 1 et bc C
C et 1 1
Ct bc Ct 1 Ct bc Ct 1 1 z
1
From (2) we have: u (Ct ) = ztu (1 bc = z
) ln 1 bc = z ) u0 (Ct ) = ztu 1 bc = z = ztu 1 bc = z
t
Zt )
" # 1
et
C et
bc C 1
1
z
0
e
Zt u (Ct ) = u 0 et = ztu
C t
; (19)
1 bc = z
ss
et is stationary. Similarly,
e0 C
where u
" # 1
et
D et
bd D 1
1
z
de0 D
e t = ztd t
(= Zt d0 (Dt )) ; (20)
1 bd = z
ss
Lt bl Lt 1
v 0 (Lt ) = ; (21)
1 bl
2 h
3 1
et
H et
bh H t
et) = zh 4
1 z
5 Zt 0
e0 (H
w t
t
= w (Ht ) : (22)
1 bh hss = zss Zth
2.2.2 First-order conditions

!t
et =
First, de…ne ! u0 (Ct ) and et = Zt u0 (Ct ) ; which
t
are both stationary. The stochastic discount factor is de…ned as:
0
i u (Ct+i ) 1 Pt+i
t;t+i u0 (Ct ) t+i
;where t+i Pt : Note that
et+i
e0 C
u
i 1 1
t;t+i = t;t+i z ; (23)
u et
e0 C t+i t+i
where t;t+i is the stochastic discount factor in stationary terms. We also de…ne the stochastic discount factor for one period
ahead as
et+1
e0 C
u 1 1
= z : (24)
e0
u et
C t+1 t+1
FOC
w.r.t. Bh;t (recall (14))
eh;t
B eh;t RtF Et [ ]
B eh;t
etB
!
" #
(1 B
t+1 ) B Bh;t 1
e 1
h
h
e t+1
+Et ! eh;t
B et (1 t )
B
t (1 h
) (25)
1+ t+1 eh;t
B
z
t t
" #
B
eh;t
B B
h
h
h
+Et et+1 (1 t+1 ) t+1 (1 ) = 0;
eh;t+1
B
w.r.t. Dt (recall (15))

2 3
de0 D
et
Et [ ] Rtd = 41 5; (26)
et
e0 C
u
PtH 1
w.r.t. Ht (recall (16) and note that PetH Pt Zth , which is stationary)
w et)
e0 (H h i h i
= PetH 1 H
Et Pet+1
H h
t+1 t+1 ft
! t
Et Pet+1
H h
t+1 t+1 :
0
e Ct
u e 1+ t
Note! It is assumed that households do not have complete rational expectations w.r.t. house prices. Instead, we assume
that a share bsa of households expects house prices to follow a moving average process, whereas a share (1 bsa ) has rational
8
expectations. To model this assumption, parts of the model need to be log-linearized. Let Yss indicate the steady-state value
of Yt and let Y^ indicate the "log-gap" from the steady-state value, Y^t = log(Yt =Yss ): Then, house price expectations are (in
log-gap form) given by
[ d [
Et Pet+1
H = bsa X H
t + (1 bsa )Pet+1
H ; (27)
where
d sa [ [
X H
t = PetH 1 + (1 sa
)X H
t 1 (28)
is the moving average process. The log-linearized FOC
w.r.t. Ht :
w et)
e0 (H [
PetH 1 H eH h
1+ b + d d
h sa dH bsa )Pet+1
H
ss ss Pss ss t+1 + t+1 + b Xt + (1
e0 C
u et
eH c d sa d [
t
e ss
! ss Pss
h
ss et + d
1+! h H
t+1 + t+1 + b Xt + (1 bsa )Pet+1
H ; (29)
1+ t
B
w.r.t. t (recall (17), leaded ):
" #
eh;t
B B
h
1
B B
h
h Beh;t
h h
et + Et et+1 t+1 (1 t+1 ) t+1 + (1 ) e t+1
! = 0; (30)
Beh;t+1 1 + t+1
W Wt
w.r.t. Wt (recall (18), and de…ne t Wt 1 ):
2 3 1
[ t 1] [1 t]
Wt 6 + W
W
t
W
t
1 7
= t Zt M RS(Lt ; Ct ) 4
e 6 W W 7
Pt h t 1 t 1
W 2 W i 5
W Pt Lt+1 ( t+1 ) t+1
E Pt+1 Lt W W 1
t t
=)
2 3 1
[ t 1] [1 t]
6 + W
W
t
W
t
1 7
ft =
W t M RS(Lt ; Ct ) 4
e 6 W W 7 ; (31)
h t 1
W
t 1
W i 5
W Lt+1 t+1 t+1
E Lt W W 1
t t
where we have used that
v 0 (Lt ) Zt v 0 (Lt ) Zt v 0 (Lt ) et ):

M RS(Lt ; Ct ) = 0
= 0
= = Zt M RS(Lt ; C (32)
u (Ct ) Zt u (Ct ) e0 C
u et
2.2.3 The constraints

B
h i
eh;t = (1 t ) 1 z B
Lastly, the constraints need to be stationary. From (9) we have: B eh;t 1 + t Et PeH h t+1
ft . By
H
1+ t t t 1+ t
t+1 t+1
log-linearizing the second term and again using the assumption that households do not have complete rational expectations
w.r.t. housing prices, (27), we get
B
eh;t = (1
B t ) 1 e t e ss eH h c
ft + d d
h sa dH [
bsa )Pet+1
H
1+ z Bh;t 1 +
1+
H ss Pss ss 1+H t+1 + t+1 + b Xt + (1 ; (33)
t t t t
from (10) and lagged we then have that
B B 1 eh;t
B 2 B
h
h h
h h
t = (1 t 1) t 1 (1 ) + 1 : (34)
z
t 1 t 1 eh;t
B 1
2.2.4 Equations included in the model

The following equations are included in the model …le, (28), (26), (25), (24), (20), (19), (33), (34), (30), (29), (22), (31), (32),
(21) and (8).
9
2.3 Steady-state equations
2.3.1 The in-period utility functions
u
u ess = zss ;
e0 C (35)
ess
C
d
e ss = zss ;
de0 D (36)
e ss
D
v 0 (Lt ) = Lss ; (37)
h
w e ss ) = zss :
e 0 (H (38)
e ss
H

Discount factor
ss z
: (39)
ss ss
FOC
w.r.t. Bh;t :
B
eh;ss eh;ss Rss
F eh;ss + ! (1 ss ) eh;ss
B B ss e ss B
! e ss ss B
1+ ss
h h
B 1 B h h
B B h h
ess (1 ss ) z ss (1 ) + ess ss (1 ss ) ss (1 ) = 0: (40)
ss ss
w.r.t. Dt :
2 3
de0 D
e ss
d
ss Rss = 41 5: (41)
ess
e0 C
u
w.r.t. Ht :
w e ss )
e 0 (H
= Pess
H
1 H eH
ss ss Pss
h
ss
ss
e ss
! eH
ss Pss
h
ss : (42)
0
e Css
u e 1+ ss
B
w.r.t. t :
B
h
1
B B
h
h Beh;ss
h h
ess + ess ss ss (1 ss ) ss + (1 ) e ss
! ss = 0: (43)
1 + ss
w.r.t. Wt :
ss = 0; (44)
0
ss = 0; (45)
fss =
W ss ess ):
M RS(Lss ; C (46)
ss 1
De…nition of MRS:
0
ess ) = v (Lss ) :
M RS(Lss ; C (47)
e0 C
u ess
10
" # 1
B
e (1 ss ) 1 ss e ss eH h
Bh;ss = 1 z
H ss Pss ss ; (48)
1+ ss ss ss 1+ ss
B h
B 1 ss B h h
h
h
ss = z ss (1 ) + 1 : (49)
ss ss
3 Intermediate goods sector

Firms in the intermediate goods sector use capital and labor to produce an intermediate good which is sold under monopolistic
competition to the …nal goods sector and as export.

The intermediate …rm n sells good Qt (n) to the …nal good sector and exports good Mt (n). It has the following production
function (where Tt (n) = Qt (n) + Mt (n)):
h 1 1 1 1
i 1
Tt (n) = (1 ) (Zt ztL LI;t (n))1 + K I;t (n)1 ; (50)
where 2 [0; 1] is the capital share and denotes the elasticity of substitution between labor and capital. The variables
LI;t (n) and K I;t (n) denote, respectively, hours used and e¤ective capital of …rm n in period t in the intermediate sector.
There are two exogenous shocks to productivity in the model: Zt refers to an exogenous permanent (level) technology process,
which grows at the gross rate zt , whereas ztL denotes a temporary (stationary) shock to productivity (or labor utilization).
Total labor input to …rm n is an index over used labor from all households j, i.e.
2 1 3 t
Z t 1
1
LI;t (n) = 4 LI;t (n; j)1 t dj 5 ; (51)
0
where t denotes the elasticity of substitution between di¤erentiated labor.
Let WI;t be the wage rate – and due to perfect labor mobility, equal to Wt – and RKI;t be the rental rate of capital,
equal to RK;t due to perfect capital mobility. Minimizing total factor outlays gives rise to the conditional demand functions
(taking factor prices as given). The Lagrangian becomes:
1
1 1 1 1
L = WI;t LI;t (n) + RKI;t K I;t (n) (1 ) (Zt ztL LI;t (n))1 + K I;t (n)1 Tt (n) :
FOC
w.r.t. LI;t (n):
1
1 1 1 1
WI;t (1 )(1 ) (Zt ztL ) LI;t (n) =0
,
1
1 1 1 1 1
(1 )(1 ) (Zt ztL ) = LI;t (n)
WI;t
,
1 1
1 1 1 1 1
(1 )(1 ) (Zt ztL ) = LI;t (n)1 : (52)
WI;t
w.r.t. K I;t (n):
1 1 1
RKI;t (1 ) K I;t (n) =0
,
1
1 1 1 1
(1 ) = K I;t (n)1 : (53)
RKI;t
11
By inserting (52) and (53) into the production function we get
1 1 1
1 1 1 1 1 1 1 1 1 1 1
(1 ) (Zt ztL )1 (1 )(1 ) (Zt ztL ) + (1 ) = Tt (n)
WI;t RKI;t
,
1 1 1 1 1 1
(1 )(1 ) ( Zt ztL ) 1
WI;t + (1 ) 1
(RKI;t )1 = Tt (n)
,
1 1
h i 1
1 1
(1 ) (1 )(Zt ztL ) 1
WI;t + (RKI;t )1 = Tt (n) : (54)
1
WI;t
To obtain an easier expression to work with, let M Ct1 = (1 ) Zt ztL
+ (RKI;t )1 . Inserting this in (54) gives
1 1 1
(1 ) 1
M Ct1 = Tt (n) : (55)
Then, by inserting the two FOCs (52) and (53) into (55) gives the demand for labor and capital respectively:
1 1
1 1 1 1 1
LI;t (n)1 (1 ) (Zt ztL ) M Ct1 = Tt (n)
WI;t
,
1
1 1 1
LI;t (n) (1 ) (Zt ztL ) M Ct = Tt (n)
WI;t
,
M Ct
LI;t (n) = (1 ) Tt (n)(Zt ztL ) 1
; (56)
WI;t
1 1 1
K I;t (n)1 (RKI;t ) 1
M Ct1 = Tt (n)
,
M Ct
K I;t (n) = Tt (n): (57)
RKI;t
R1 R1
In symmetric equilibrium all n …rms make the same decision LI;t (n) = LI;t , so LI;t = 0 LI;t (n)dn = 0 LI;t dn =
R1
LI;t 0 1dn = LI;t = LI;t (n): Similarly, K I;t = K I;t (n) and Tt = Tt (n). To …nd the expenditure function, insert (56) and
(57) into t (WI;t ; RKI;t ; Tt ) = WI;t LI;t + RKI;t K I;t to get
M Ct M Ct
t = WI;t (1 ) Tt (Zt ztL ) 1
+ RKI;t Tt
WI;t RtK
,
1
WI;t
t = (1 ) M Ct Tt + (RKI;t )1 M Ct Tt
Zt ztL
,
t = M Ct1 M Ct Tt = M Ct Tt :
The marginal cost function can be found by:

" 1 #11
d t WI;t
= M Ct = (1 ) + (RKI;t )1 : (58)
dTt Zt ztL
Before we proceed with deriving …rm n’s optimal prices, we will …rst …nd the conditional labor demand functions fac-
ing household j, LI;t (j) (as this was used in the household optimization problem above). Firm n will minimize labor
12
R1
costs subject to the optimal level of labor input (remember that WI;t (j) = Wt (j)): min LI;t (n; j)Wt (j)dj subject to
lI;t (n;j) 0
2 1 3 t
Z t 1
1
4 LI;t (n; j)1 t dj 5 = LI;t (n): This gives the following Lagrangian:
0
2 1 3
Z 1 Z 1
1 t
L= LI;t (n; j)Wt (j)dj 4 LI;t (n; j)1 t dj LI;t (n) t 5:
0
0
FOC w.r.t. LI;t (n; j) :
1 1
Wt (j) 1 LI;t (n; j) t =0
t
,
1
1 1
Wt (j) 1 = LI;t (n; j) t
t
,
1
1 t
t 1
Wt (j)1 t 1 = LI;t (n; j) t : (59)
t
Inserting the FOC into the labor constraint gives
Z1 1
1 t
t 1
Wt (j)1 t 1 dj = LI;t (n) t
t
0
,
1 Z1
1 t
t 1
1 Wt (j)1 t dj = LI;t (n) t :
t
0
2 1 31 1
Z t
The wage rate can be de…ned as: Wt 4 Wt (j)1 t dj 5 . Inserting this, that Wt = WI;t and in the second line using
0
the FOC (59) gives
1
1 t
1 t 1
1 Wt t
= LI;t (n) t
t
,
t 1 t 1
1 1
LI;t (n; j) t Wt (j) t Wt t
= LI;t (n) t
,
Wt (j) t
LI;t (n; j) = LI;t (n)

Wt
R1
Then, to …nd the labor demand curve facing household j; i.e LI;t (j) = 0
LI;t (n; j)dn:
Z 1 Z 1
Wt (j) t
LI;t (j) = LI;t (n; j)dn = LI;t (n)dn

0 0 WI;t
,
Z 1
Wt (j) t
LI;t (j) = LI;t (n)dn

Wt 0
,
Wt (j) t
LI;t (j) = LI;t : (60)

Wt
13
Note that the labor demand from the oil sector LO;t (j) will follow similarly. Total demand facing facing household j:
t
LI;t (j) + LO;t (j) = Lt (j) = WWt (j)
t
Lt (where we have used that WI;t = WO;t = Wt due to perfect labour mobility).
This is used in the household section. See (7).
Firms in the intermediate sector sell their goods under monopolistic competition. Each …rm n charges di¤erent prices at
home and abroad: PtQ (n) in the home market and PtM (n) abroad, where the latter is denoted in foreign currency. Pro…ts
(which are paid out as dividends to households) becomes:
t (n) = PtQ (n) Qt (n) + PtM (n) St Mt (n) WI;t LI;t (n) RKI;t (n)K I;t (n); (61)
where Qt (n) + Mt (n) = Tt (n); and St is the nominal exchange rate ("NOK per foreign currency unit").
The costs of adjusting prices in the domestic and the foreign market are:
" #2
PQ
PtQ (n) =PtQ 1 (n)
P Q;t (n) 1 ; (62)
2 PtQ 1 =PtQ 2
" #2
PM
PtM (n) =PtM1 (n)
P M ;t (n) 1 (63)
2 PtM1 =PtM2
hR H
i 1 hR F
i 1
F
1 Q 1 H 1 1
PtQ and (PtQ
1 1
respectively, where PtM are price indexes = 0
Pt (n) t
dn t
, PtM = 0
PtM (n) t
dn t
).
PQ PM
The costs of changing prices are governed by the parameters and .
As shown in chapter 4, the intermediate …rm n faces the following demand function from the …nal good sector: Qt (n) =
H
PtQ (n) t
PtQ
Qt (see (85)), where Ht is the elasticity of substitution between domestic goods produced by di¤erent …rms
in the intermediate goods sector. This parameter is assumed to follow an AR process. Correspondingly, the demand from
F
PtM (n) t
F
abroad is Mt (n) = PtM
Mt , where t is the same elasticity of substitution but from the foreign …nal goods
sector. Optimal price setting for …rm n gives the following maximization problem4 :
8 H F
" H F
# 9
>
< P Q (n) >
Mt =
1
X PtQ (n) t PtM (n) t
PtQ (n) t PtM (n) t
t PtQ
Qt + PtM (n) St PtM
Mt M Ct PtQ
Qt + PtM
s = s;t :
t=s
>
: Q
>
;
M
P Q;t (n)Pt Qt P M ;t (n)Pt St Mt
FOC w.r.t. PtQ (n):
! H
t
! H
t 1
PtQ (n) PtQ (n) H PtQ (n)
Qt t Qt
PtQ PtQ PtQ
! H
1 " #
PtQ (n) =PtQ 1 (n) 1=PtQ 1 (n)
t
PtQ (n) Qt
+M Ct H
t
PQ
1 PtQ Qt
PtQ PtQ PtQ 1 =PtQ 2 PtQ 1 =PtQ 2
8 " # !2 9
< Q
Pt+1 (n) =PtQ (n) Q
Pt+1 (n) 1 =
PQ Q
+Et 1 Pt+1 Qt+1 = 0:
: PtQ =PtQ 1 PtQ =PtQ 1 PtQ (n) ;
hR H
i 1
1 1 H
In symmetric equilibrium, all …rms will behave the same. Hence, from the de…nition of the price index, PtQ = PtQ (n)
1
0
t
dn t
h Q HR i 1H Q
1
= P t = PtQ (n) : Using this, the FOC can be rewritten as
1
P t 1 t 0 1dn t
4 Note, to make the expression easier to work with, the costs of adjusting prices are linear in PtQ Qt and not PtQ (n)Qt (n)
14
" #
H Qt PtQ =PtQ 1 PtQ =PtQ 1
Qt t Qt + M Ct H
t
PQ
1 Qt
PtQ PtQ 1 =PtQ 2 PtQ 1 =PtQ 2
( " Q
# Q )
PQ Pt+1 =PtQ (Pt+1 =PtQ )2
+Et 1 Qt+1 = 0: (64)
PtQ =PtQ 1 PtQ =PtQ 1
Similarly, the FOC w.r.t. PtM (n) can be written as

" #
F Mt PtM =PtM1 PtM =PtM1
St Mt t St Mt + M Ct F
t
PM
1 St Mt
PtM PtM1 =PtM2 PtM1 =PtM2
( " # 2 )
M
PM
M
Pt+1 =PtM Pt+1 =PtM
+Et 1 St+1 Mt+1 = 0: (65)
PtM =PtM1 PtM =PtM1

3.2.1 De…nitions
From (50) we get that
1
e1
1
Tt 1 1 1
= Tet = (1 ) (ztL LI;t )1 + K I;t : (66)
Zt
fI;t
To make the factor prices stationary, W
WI;t e RKI;t
Pt Zt and RKI;t Pt where Pt is the price of the …nal good.
3.2.2 Demand equations

" 1
#11
fI;t
From (58) we have: M Ct g
=M C t = (1 )
W eKI;t )1
+ (R . Use this in (56) to get that
Pt ztL
!
g
LI;t = (1 ) M Ct
Tet (ztL ) 1
: (67)
fI;t
W
Note that this can be rewritten as
" #1
g fI;t LI;t 1
1
M Ct = W (ztL ) : (68)
(1 )Tet
!
e = g
M Ct
K I;t Tet : (69)
RetK
This can be rewritten as
" #1
eKI;t = 1
g Tet
R M Ct : (70)
e
K I;t
The costs of adjusting prices ((62) and (63)) are already stationary. Using PtQ = PtQ (n), PtM = PtM (n) and de…ning
Q PtQ M PtM
t PtQ 1
and t = PtM 1
;the equations can be rewritten as
" #2
PQ Q
t
P Q;t = Q
1 ; (71)
2 t 1
PM M 2
t
P M ;t = M
1 : (72)
2 t 1
15
" #
Qet Q Q
et
Q H e
t Qt
g
+M Ct H
t
PQ t
1 t e
Qt
e
PtQ Q Q
t 1 t 1
( " Q
# Q
)
2
PQ t+1 ( t+1 ) e
+Et Q
1 Q
Qt+1 zt+1 = 0: (73)
t t
Similarly, for (65) we get that
Mft M M
Set M
ft F
t Set M
ft + M
g Ct F
t
PM t
1 t
Set M
ft
e
PtM M
t 1
M
t 1
M M 2
PM t+1 ( t+1 ) e ft+1 zt+1
+Et M
1 M
St+1 M = 0: (74)
t t

The following equations are included in the model in the intermediate good sector: (66), (68), (70), (71), (72), (73) and (74).

From (66):
1
e1
1
1 1 1
Tess = (1 ) LI;ss 1 + K I;ss : (75)
From (68):
" #1
g fI;ss LI;ss
M C ss = W : (76)
(1 )Tess
From (70):
" #1
eKI;ss = 1
g Tess
R M C ss : (77)
e
K I;ss
The adjustment costs (from (71) and (72)): P Q;ss = P M ;ss = 0: Finally, the optimal prices from (73) and (74) become:
H
Pess
Q g
=M C ss H
ss
; (78)
( ss 1)
g
M C ss F
Pess
M
= ss
: (79)
e
Sss F
1
ss
4 Final goods sector

The …nal goods sector combines imported goods Mt and domestic goods Qt to produce a …nal good At that is sold at a price
Pt . The …nal good (or aggregate good) can be thought of as a consumption basket, but it is also used as input to the oil
supply sector, for investments and government expenditure.
The production function is given by
1 1 1
1 1 1 1
At = Qt + (1 ) Mt ; (80)
16
where is the domestic goods share and is the elasticity of substitution between domestic and imported goods. The
domestic goods Qt is a composite of domestic goods produced by the di¤erent …rms in the intermediate goods sector, Qt (n),
i.e.
H
Z 1 1
t
H 1
1 H t
Qt = Qt (n) t dn : (81)
0
Here Ht is the elasticity of substitution between domestic goods produced by di¤erent …rms in the intermediate goods sector.
This parameter is a shock and assumed to follow an AR process. The imported goods Mt is a composite of imported goods
produced by the di¤erent …rms in the intermediate goods sector abroad, Mt (f ), i.e.
F
Z 1 1 F
t
1
1 F t
Mt = Mt (f ) t df ; (82)
0
where F t is the elasticity of substitution between imported goods produced by di¤erent …rms in the intermediate goods
sector abroad. This parameter is a shock and assumed to follow an AR process.
4.1 Cost minimization

The …nal good sector needs to …nd the optimal combination of Qt and Mt , which is found by cost minimization:
h i
min PtQ Qt + PtM Mt ;
fQt ;Mt g
s.t. (80).
FOCs
!
PtQ
Qt = At ; (83)
Pt
PtM
Mt = (1 ) At; (84)
Pt
h i11
where Pt (PtQ )1 + (1 )(PtM )1 : From perfect competition, the price of the …nal good At is the marginal
cost, Pt .
Then, to …nd the demand facing each intermediate …rm n (and f abroad), the …nal good sector minimizes the cost of its
inputs Qt (n) given the prices set by di¤erent …rms in the intermediate goods sector:
Z 1
min PtQ (n)Qt (n)dn;
fQt (n)g 0
s.t. (81).
FOC
! H
t
PtQ (n)
Qt (n) = Qt ; (85)
PtQ
where
Z 1 1
1
H
H t
PtQ = PtQ (n)1 t dn : (86)
0
Same type of cost minimization problem for Mt (f ) leads to

F
PtM (f ) t
Mt (f ) = Mt ; (87)
PtM
where
Z 1 1
1
F
F t
PtM = PtM (f )1 t df : (88)
0
17
1 1 1
et =
A
1
e 1t
Q + (1
1
) Mft1 ; (89)
et =
Q PetQ et ;
A (90)
ft = (1
M ) PetM et :
A (91)
The following equations are included in the model …le: (89), (90) and (91).

1 1 1
1 1 1 1
ess =
A e ss
Q + (1 ) Mfss ; (92)
e ss =
Q Pess
Q ess ;
A (93)
fss = (1
M ) Pess
M ess :
A (94)
5 Entrepreneurs
Entrepreneurs are households, but this section focuses on a separate part of the households’budget balance. We distinguish
the problem like this because it is clearer (alternatively this sector could have been modeled as a …rm, owned by the
households). Entrepreneurs rent capital to the intermediate goods sector and the oil sector gaining the rental rate RK;t (=
RKI;t = RKO;t due to perfect capital mobility). They rent out K I;t to the intermediate goods sector and K O;t to the oil
supply sector. K t is then the aggregate utilized capital rented out by the entrepreneurs. At the beginning of period t they
sell the undepreciated capital (1 ) Kt 1 at price PtK to the capital producer. The latter combines it with investment
goods to produce Kt to be sold back to entrepreneurs at the same price. To …nance their activity, entrepreneurs borrow Be;t
from banks at gross rate Rte ; providing capital goods as collateral. They enter in a multi-period loan contract. Finally they
also decide the capital utilization rate ut .
We de…ne utilized capital in period t as
K t = ut Kt 1: (95)
Entrepreneurs are subject to the following budget constraint:
RK;t PtK PtK Pt 1 1

ut K t 1 + (1 ) Kt 1 + Be;t Kt + Rte Be;t 1 + (ut ) Kt 1 + Ct + t; (96)
Pt Pt Pt Pt Pt
where Ct is household consumption, and (ut ) Kt 1 is a cost that depends positively on the utilization rate of capital:
RK;ss h u (ut 1)
i
(ut ) = e 1 ; (97)
Pss u
where u governs the cost of adjusting the utilization rate. t represents all other terms that enter into the household budget
constraint (3). Similarly, all terms in (96) (except Ct and t) are part of DIVt in (3).
Total utilized capital rented out must be equal to the utilized capital demanded by the intermediate goods sector and by
the oil supply sector, K t = K I;t + K O;t .
Whereas households could borrow against their housing capital, the entrepreneurs can borrow against their real capital
(1 ) Kt : Corresponding to the household constraint (9) and (10), this gives the following collateral constraints that need
to hold:
18
e ent K
(1 t) Pt 1 t Pt+1 Pt+1
Be;t = ent Be;t 1 + Et (1 ) Kt ; (98)
1+ t Pt 1 + ent
t Pt+1 Pt
e e Pt 1 Be;t 1 h e e
e
e
i
e
e
t+1 = (1 t) ( t) (1 ) + (1 ) ; (99)
Pt Be;t
where ent
t governs the constraint on new loans, and is assumed to follow an AR process. See (418) for the relationship
between ent
t and the loan-to-value ratio. et is loan repayments and e and e are exogenous parameters. See discussion on
page 5, section 2 for more on these parameters. Inserting for Ct from (96), we get the following Lagrangian:
e
L(fBte ; Kt ; t ; ut g) =
2 3
RK;t PtK PtK
u Pt ut Kt 1 + Pt (1 ) Kt 1 + Be;t Rte PPt t 1 Be;t 1
Pt Kt (ut ) Kt 1 1
Pt +
1
X 6 h h K ii 7
t s 6 (1 e
t ) Pt 1
ent Pt+1 Pt+1 7
Es 6 ! et Be;t 1+ ent P B e;t 1
t
ent E t Pt+1 Pt (1 ) K t 7;
t=s
4 h t t h 1+ te e
i e
i 5
e e e Pt 1 Be;t 1 e e e
t t+1 (1 t ) Pt Be;t ( t ) (1 ) (1 )
where ! et and et are the Lagrangian multipliers and includes all elements of the households maximization problem (11)
not in focus here (i.e the utility functions with respect to deposits, housing, leisure as well as the constraints).
FOC
w.r.t Kt :
ent K K
PtK t Pt+1 Pt+1 Pt+1 RK;t+1
u0 (Ct ) = Et ! et ent (1 ) + Et u0 (Ct+1 ) (1 )+ ut+1 (ut+1 ) : (100)
Pt 1 + t Pt+1 Pt Pt+1 Pt+1
Be;t
w.r.t. Bte (and multiplying with u0 (Ct ) ):
u0 (Ct+1 ) Pt e ! et
Be;t Be;t Et R t Be;t
u0 (Ct ) Pt+1 u0 (Ct )
" #
!e u0 (Ct+1 ) Pt (1 e e h i
t+1 ) Be;t 1 Pt 1 e e
+Et 0 t+1 ent B e;t
t
(1 e
t) ( et ) (1 e
) (101)
u (Ct+1 ) u0 (Ct ) Pt+1 1 + t+1 u0 (Ct ) Be;t Pt
e
u0 (Ct+1 ) Pt Be;t h e e
i
t+1 e e e
+Et 0 0
(1 t+1 ) t+1 (1 ) = 0:
u (Ct+1 ) u (Ct ) Pt+1 Be;t+1
e
w.r.t. t:
e
Be;t 1 Pt 1 e
1 e Be;t 1 Pt 1
e
t 1 + e
t
e
( et ) (1 B
t )
B
t + (1 e
) ! et = 0: (102)
Be;t Pt 1 + ent
t Pt
w.r.t. ut :
RK;t 0
= (u;t ) : (103)
Pt
where (recall (97))
0 RK;ss u (ut 1)
(ut ) = e : (104)
Pss

! et e
e et =
First, de…ne ! u0 (Ct ) and eet = Zt u0 (Ct ) ;
t
which are both stationary.

Making the FOC
w.r.t. Kt stationary gives:

ent h i
PetK = Et !
e et t
Pet+1
K
t+1 (1 ) + Et Pet+1
K
(1 eK;t+1 ut+1
)+R (ut+1 ) : (105)
1 + ent
t
19
w.r.t. Bte stationary gives:
Bee;t ee;t Rte Et [ ]

B ee;t
e et B
!
" #
(1 e e h i
t+1 ) e Be;t 1 1 e e
e et+1
+Et ! ent Be;t eet (1 t) ( et ) (1 e
) (106)
1+ t+1
ee;t
B
z
t t
" #
ee;t h
B e e
i
+Et eet+1 (1 e
t+1 )
e
t+1 (1 e
) = 0:
ee;t+1
B
e
w.r.t. t (leaded) stationary gives:
" #
ee;t h
B e
1 e e
i Bee;t
e
et + Et eet+1 e e
t+1 (1 e
t+1 )
e
t+1 + (1 e
) e et+1
! = 0: (107)
ee;t+1
B 1 + ent
t+1
w.r.t. ut stationary gives:
eK;t =
R 0
(ut ) : (108)
5.2.2 De…nitions
et
e = uK 1
K t z ; (109)
t
eK;ss h
R i
(ut ) = e u (ut 1)
1 ; (110)
u
0 eK;ss e
(ut ) = R u (ut 1)
: (111)

e ent h i
ee;t = (1
B t) 1 e t
Pet+1
K et ;
ent z Be;t 1+ Et t (1 )K (112)
1+ t t t 1 + ent
t
1 ee;t
B h e e
i e
e e 2 e e e
t = (1 t 1) t 1 (1 ) + (1 ) : (113)
z
t 1 t 1 ee;t
B 1

The following equations are included in the model …le, (105), (106), (107), (108), (109), (110), (111), (112) and (113).

FOC
w.r.t. Kt :
ent 1
Pess
K
= 1 (1 ) e ess
! ss
ss + ss ss RKss :
e (114)
1 + ent
ss
w.r.t. Bte :
e
ee;ss ee;ss Rss ee;ss + ! (1 ss )
B B e
ss e ess B
! e ess ss ent Be;ss
1 + ss
1 h e e
i h e e
i
eess (1 e
ss ) z
( e
ss ) (1 e
) + eess ss (1
e
ss ) ( ess ) (1 e
) = 0: (115)
ss ss
e
w.r.t. t:
h e e e
i ee;ss
B
1
eess + eess ss
e
( e
ss ) (1 e
ss ) ( e
ss ) + (1 e
) e ess
! ss = 0: (116)
1 + ent
ss
w.r.t. ut :
eK;ss =
R 0
(uss ) : (117)
20
5.3.2 De…nitions
uss = 1; (118)
e =K e ss
K ss z
; (119)
ss
(uss ) = 0: (120)
5.3.3 Constraints
e 1 ent
ee;ss = 1 (1 ss ) 1
B ent
ss
ss (1 ) Pess
K e
Kss ; (121)
1+ ss
z
ss ss 1 + ent
ss
1 h e e
i e
e e e e e
ss = (1 ss ) z
( ss ) (1 ) + (1 ) : (122)
ss ss
6 Capital producer
Capital goods, Kt , are produced by a separate sector. At the beginning of period t the capital goods producer buys
undepreciated capital (1 ) Kt 1 at price PtK from the entrepreneurs, and combines it with gross investment goods IC;t to
produce Kt to be sold back to entrepreneurs at the same price. I.e. the capital producer is subject to a market with full
competition, and therefore earns no pro…t. IC;t is bought from the …nal goods sector at a price Pt .

Maximize pro…ts leads to:
max [PtK Kt PtK (1 ) Kt 1 Pt IC;t ];

fIC;t g
s.t. the capital accumulation equation:
Kt = (1 )Kt 1 + t Kt 1 ; (123)
where we refer to the last term, t Kt 1 , as "net investments", de…ning
2 2
IC;t I1 IC;t IC;ss zss I2 IC;t IC;t 1
t = zI;t : (124)
Kt 1 2 Kt 1 Kss 2 Kt 1 Kt 2
The parameters I1 and I2 govern the degree of adjustment costs, and zI;t is an investment shock following an AR process.
Note that because of the adjustments costs, net investments are smaller than gross investments, t Kt 1 < IC;t (except in
steady-state).
Maximization gives the following FOC w.r.t. IC;t :
PtK 1 1
= 0 = 0; (125)
Pt Kt 1 t t
0
where t is the derivative of t:
0 1 IC;t IC;ss zss 1 IC;t IC;t 1 1

t = I1 zI;t I2 ; (126)
Kt 1 Kt 1 Kss Kt 1 Kt 1 Kt 2 Kt 1
i.e.
0 IC;t IC;ss zss IC;t IC;t 1

t =1 I1 zI;t I2 : (127)
Kt 1 Kss Kt 1 Kt 2
21
Capital accumulation equation:
e t = (1
K
)e
Kt +
t e
z 1 z Kt 1 : (128)
t t
Capital adjustment costs:
" #2 " #2
IeC;t z
t I1 IeC;t z
t IeC;ss zss I2 IeC;t z
t IeC;t 1 z
t 1
t = zI;t : (129)
Ket 1 2 Ket 1 Ke ss 2 Ket 1 Ket 2
FOC w.r.t. IC;t :

1
PetK = 0 ; (130)
t
where
" # " #
0 IeC;t z
t IeC;ss zss IeC;t z
t IeC;t 1 z
t 1
t =1 I1 zI;t I2 : (131)
Ket 1 Ke ss Ket 1 Ket 2

The following equations are included in the model …le: (128), (129), (130) and (131).

Capital accumulation equation:
e ss = (1
K
)e
Kss +
ss e
Kss : (132)
z z
ss ss
Capital adjustment costs:
IeC;ss zss
ss = : (133)
Ke ss
FOC w.r.t. IC;t :
1
PetK = 0 = 1; (134)
ss
where
0
ss = 1: (135)
7 Housing producer
At the beginning of period t the housing producer buys the undepreciated housing stock (1 ) Ht 1 at price PtH from
households, and combines it with housing investment goods IH;t to produce Ht to be sold back to households at the same
price. The housing producer is subject to a market with full competition, and therefore earns no pro…t. IH;t is bought from
the …nal goods sector at a price Pt . zHS;t is an exogenous shock to house prices, which follows an AR process.

Maximize pro…ts:
PtH
max Ht PtH (1 ) Ht 1 Pt IH;t ;
fIH;t g zHS;t
s.t. the housing accumulation equation:
Ht = (1 H )Ht 1 + H;t Ht 1 ; (136)

where H;t Ht 1 is "net housing investments" and H;t is de…ned as
22
z 2 2
IH;t H1 IH;t IH;ss ss H2 IH;t IH;t 1
H;t = zIH;t : (137)
Ht 1 Zth 2 Ht 1 Zth Hss h
ss 2 Ht 1 Zth Ht 2 Zth 1
The parameters H1 and H2 govern the degree of adjustment costs, and zIH;t is a housing investment shock following an
AR process. See section 1.1 for the de…nition of the housing productivity parameter Zth .
FOC w.r.t. IH;t :

1
PtH zHS;t IH;t IH;ss z
ss IH;t IH;t 1
= = zHS;t Zth 1 H1 zIH;t H2 ; (138)
Pt Ht 1 0H;t Ht 1 Zth Hss h
ss Ht 1 Zth Ht 2 Zth 1
as
z
0 1 IH;t IH;ss ss 1 IH;t IH;t 1 1
H;t = h H1 zIH;t H2 : (139)
Ht 1 Zt Ht 1 Zth Hss h
ss Ht h
1 Zt Ht 1 Zth Ht 2 Zth 1 Ht h
1 Zt

First we note that
IH;t
IH;t
Zt Zt
IeH;t ZZt t 1 IeH;t z
t
= = = ; (140)
Ht 1 Zth Ht 1 Zth 1 Zt 1
Zth et
H
Zth et 1
H h
t
1 Zth 1
Zt 1 Zth 1
and repeat how to make the real house price stationary:
PH
PetH = t h : (141)
Pt Z t
Housing accumulation equation:
h h
et = t (1 H) et t H;t e
H z H 1 + z Ht 1 : (142)
t t
Housing adjustment costs:
" #2 " #2
IeH;t z
t I1 IeH;t z
t IeH;ss z
ss I2 IeH;t z
t IeH;t z
1 t 1
H;t = zIH;t : (143)
et 1
H h
t
2 et 1
H h
t He ss h 2 et 1
H h
t Het h
2 t 1
ss
FOC w.r.t. IH;t :

" # " #! 1
IeH;t z
IeH;ss z
IeH;t z IeH;t z
1 t 1
PetH = zHS;t 1 H1
t ss
zIH;t H2
t
: (144)
et 1
H h
t He ss h
ss
et 1
H h
t Het h
2 t 1

The following equations are included in the model …le, 142, 143 and 144.

Housing accumulation equation:
h h
e ss = ss (1 H) e ss + ss H;ss e
H z
H z
Hss : (145)
ss ss
Housing adjustment costs:
IeH;ss z
ss
H;ss = : (146)
He ss h
ss
FOC w.r.t. IH;t :
Pess
H
= zHS;ss : (147)
23
8 Banking sector
We assume that there is an in…nte number of banks, indexed by i 2 [0; 1]. Each bank consists of two “retail”branches and a
“wholesale” branch. One retail branch is responsible for providing di¤erentiated loans to households and to entrepreneurs,
while the other retail branch takes care of the deposit side. Both branches set interest rates in a monopolistically competitive
fashion, subject to adjustment costs. The wholesale branch manages the capital position of the bank. Its task is to choose
the overall level of operations regarding deposit and lending, taking into account the capital requirement, and internalizing
the distribution of the idiosyncratic shock to overall returns.
Bank capital plays an important role for credit supply in the model through a potential feedback loop between the real
and the …nancial side of the economy. We assume that banks have to adhere to a regulatory capital requirement. Failing to
do so, will incur a cost proportional to total assets (lending). The existence of an idiosyncratic shock to returns will typically
lead banks to aim for a cushion above the capital requirement
The balance sheet of bank i (in real terms):

T OT
Bt (i) = BF;t (i) + KtB (i) ; (148)
T OT
where Bt (i) is total assets (total lending). On the liability side, BF;t (i) is total external bank funding and KtB (i) is bank
capital (equity). Total external bank funding is the sum of household deposits and foreign debt, i.e
T OT
BF;t (i) = Dt (i) + Bt (i) : (149)
Make note that Pt Bt (i) is nominal foreign bank debt in home currency. Total lending is the sum of lending to entrepreneurs
and households:
Bt (i) = Be;t (i) + Bh;t (i) : (150)

If banks fail to reach their capital requirements, they will incur a penalty Bt (i). The probability of not reaching their
capital requirement is F ! B B
t (i) (see section 8.1.1 for a de…ntion of F and ! t (i)). Pro…ts in period t for bank i as a whole
is then given by:
Jt (i) = (RtF (i) 1)Bh;t (i) + (Rte (i) 1)Be;t (i) (Rtd (i) 1)Dt (i) (Rt 1)Bt (i) Bt (i) F ! B
t (i) ; (151)
where RtF (i) 1 is the net interest rate on loans to households, Rte (i) 1 is the net interest rate on loans to entrepreneurs,
Rtd (i) 1 is the net deposit interest rate and Rt 1 is the net money market interest rate. Bank capital is accumulated
according to:
b Pt 1 B
KtB (i) = (1 ) Kt 1 (i) + Jt 1 (i) ; (152)
Pt
b
where is the share of the bank capital payed out to shareholders (households) as lump sum transfers.

8.1.1 Wholesale branch
The wholesale branch lends to the loan branch and is funded through borrowing from the deposit branch. Banks di¤er in
that the overall return on their lending is subject to an idiosyncratic shock ! B t (i) (which is log-normally distributed with
E !B t (i) = 1, standard deviation B
t (it is a time varying and modeled as an AR process), probability density function
f !Bt (i) and cumulative density function F ! B
t (i) ). The banks will incur a penalty whenever their (end-of-period) bank
capital is lower than a share B t of total assets (which follows an AR process), i.e.
RtA (i) Bt (i) ! B

t (i) Rtab BF;t
T OT
(i) < B A
t Rt (i) Bt (i) ! B
t (i) ; (153)
where we have de…ned
Bh;t (i) Be;t (i)
RtA (i) RtF (i) + Rte (i) ; (154)
Bt (i) Bt (i)
Dt (i) B (i)
Rtab (i) Rtd (i) T OT
+ Rt T tOT ; (155)
BF;t (i) BF;t (i)
24
as the average lending rate and the average funding rate respectively. For a given level of operations and returns, there
will exist a level of the idiosyncratic shock, ! B B B
t (i), such that whenever ! t (i) < ! t (i) banks will fail to meet the capital
requirement. Using condition (153) we can de…ne this cut-o¤ value as
Rtab (i)BF;t
T OT
(i)
!B
t (i) = B
: (156)
1 t RtA (i) Bt (i)
It follows that the probability of not reaching the capital requirement is F ! B

t (i) :
The wholesale branch lends to the loan branch at the interest rate Rtb (i) and is funded through borrowing from the
deposit branch at a rate which has to be equal to the money market rate Rt (this follows from no arbitrage condition, since
we assume that banks have access to unlimited …nancing at the money market interest rates). It takes these interest rates
as given which results in the following problem:
max Et Rtb (i) Bt (i) Rt [Dt (i) + Bt (i)] Bt (i) F ! B

t (i) ; (157)
fBt (i);Dt (i);Bt (i)g
s.t. (156).
To make the problem easier to solve, we de…ne
b Bt (i)
t (i) ;
KtB (i)
and rewrite the maximization problem as
" !#
Rtab (i) 1
max Et Rtb (i) Rt b
t (i) + Rt (i) b
t (i) F B RA (i)
1 b (i)
:
f bt (i)g 1 t t t
b
FOC w.r.t. t (i):
Rtb (i) Rt = F !B
t (i) f !B B b
t (i) ! t (i) ( t (i) 1) 1
:
We assume that there exists a …nancial intermidiary between banks home and abroad. This intermidiary borrows from
B B
banks abroad at a gross interest rate 1 t Rt , where 1 t is the risk premium (see (159)) and Rt is the foreign money
market interest rate. Let St be the nominal exchange rate (“NOK per foreign currency unit”). The full amount is then lent
out to banks at home at the gross interest rate Rt . At the start of the next period the debt to foreign banks are repaid,
and …nancial intermidiary sells at price St+1 when selling home currency. If we assume that the …nancial intermidiary is risk
neutral, a zero pro…t condition in expectation reads
h i St+1
B
Et 1 t Rt = Rt ; (158)
St
which is this models version of the uncovered interest parity (UIP). It is assumed that the risk premium depends positively
on the level of total foreign debt for the country as a whole, BtT OT :
exp B2 etT OT
B ess
B T OT
1
B B1
t = ztB : (159)
exp B2 etT OT
B ess
B T OT +1
T OT B
(note that BetT OT Bt @(1
is stationary and @B T OTt )
> 0). ztB is the exogenous exchange rate risk premium that follow
Zt t
an AR process. The assumption of a …nancial friction is also necessary to guarantee that the net assets positions follow a
stationary process.
Total foreign debt accumulation for the home country as a whole is given by:
Pt 1
BtT OT = R B T OT N Xt ; (160)
Pt t t 1
where N Xt is net export for the country,
25
St PO ;t PtR PM ;t PM;t
N Xt = YO;t + St MO ;t + St Mt Mt :
Pt Pt Pt Pt
R1
Naturally, foreign debt for the country as a whole is equal to total banking foreign debt (Bt = 0
Bt (i)di) less government
claims (oil fund), BF;t :
BtT OT = Bt BF;t : (161)

See the section on the oil sector below (in particular (236)).
8.1.2 Loan branch

The loan branch lends to households and entrepreneurs (at gross rates RtF (i) and Rte (i) respectively) and borrows from the
wholesale branch at the interest rate Rtb (i). It faces costs when changing the rates, governed by the parameter F and e : To
R1
…nd the demand curve for household loans facing the loan branch i, every household will solve min 0 RtF (i)Bh;t (i; j) di
Bh;t (i;j)
IH
t
R1 1 1
IH
IH 1
t IH
subject to 0
Bh;t (i; j) t di = Bh;t (j) ; where t is the elasticity of substitution between loans from all loan
branches (it is also a shock and is assumed to follow an AR process). This will give the demand from household j for
IH hR i 1IH
RtF (i) t 1 F 1 IH 1
loans from branch i : Bth (i; j) = RtF Bt
h
(j); where Rt
F
is de…ned as R F
t = 0
R t (i) t di t
: Summing
h
R 1 h
over all households gives the total demand facing the loan branch i from the household sector: Bt (i) = 0 Bt (i; j) dj =
RtF (i)
IH
t R1 h RtF (i)
IH
t
RF 0
Bt (j)dj = RF
Bth :
t t
A similar exercise for the entrepreneurs gives their corresponding demand function, Bte (i) with the corresponding elasticity
of substitution et ; which is also a shock in the model and assumed to follow an AR process. The maximization problem
becomes:
" #
X1 RtF (i) Bh;t (i) + Rte (i) Be;t (i) Rtb (i) Bt (i)
max Es F F 2 e e 2 ;
s;t Rt (i) Rt (i)
fRtF (i);Rte (i)g t=s 2 RtF 1 (i)
1 RtF Bh;t 2 Rte 1 (i) 1 Rte Be;t
s.t.
Bt (i) = Be;t (i) + Bh;t (i) ; (162)
IH
RtF (i) t
Bth (i) = Bth ; (163)

RtF
e
Rte (i) t
Bte (i) = Bte : (164)

Rte
FOC w.r.t. RtF (i):
h i h i
Bh;t (i) Bh;t (i) F RtF (i) RtF
Bh;t (i) + RtF (i) RtF (i)
Rtb (i) RtF (i) RtF 1 (i)
1 B
RtF 1 (i) h;t
F
Rt+1 (i) 2 ; (165)
F 1 F F Pt+1
+Et RtF (i)
1 RtF (i)
Rt+1 (i) Rt+1 Pt Bh;t+1 = 0
where
Bh;t (i) IH Bh;t (i)
= t : (166)
RtF (i) RtF (i)
F
hR i 1
1 IH 1 IH
All banks will behave the same and set the same interest rate, RtF (i) = Rt for all i: RtF = 0
RtF (i)1 t di t
=
hR i 1IH h F R1 i 1IH
1 F 1 IH 1 1 IH 1 F
0
R t
t di t
= R t
t
0
1di t
= Rt = RtF (i) : Using this and substitute in from (166) we can rewrite
(165) as
" 2
#
b F F
IH IH Rt F RtF RtF F Rt+1 Rt+1 Pt+1 Bh;t+1
1 t + t 1 + Et 1 = 0: (167)
RtF RtF 1 RtF 1 RtF RtF Pt Bh;t
26
Similarly, the FOC w.r.t. Rte (i) becomes:
" #
b e e 2
e e Rt e Rte Rte e Rt+1 Rt+1 Pt+1 Be;t+1
1 t + t e 1 + Et 1 = 0: (168)
Rt Rte 1 Rte 1 Rte Rte Pt Be;t
8.1.3 Deposit branch

The deposit branch lends to the wholesale branch at the money market interest rate Rt and pays out interest on household
deposits at gross rate Rtd (i). It faces costs when changing the deposit rate, governed by the parameter D . Total household
demand for deposits facing branch i, Dt (i) ; is found in the same way as the demand for loans (see above).
1
" 2
#
X D
R d
(i)
t
max Es s;t Rt Dt (i) Rtd (i) Dt (i) 1 Rtd Dt ;
fRtd (i)g t=s
2 Rtd 1 (i)
s.t.
D
Rtd (i) t
Dt (i) = Dt ; (169)
Rtd
where D
t is the elasticity of substitution between deposit services from all branches, and is a shock and assumed to follow
an AR process.
The FOC w.r.t. Rtd (i) becomes:

" 2
#
d d
D D Rt D Rtd Rtd D Rt+1 Rt+1 Pt+1 Dt+1
(1 t ) t 1 + Et 1 = 0; (170)
Rtd Rtd 1 Rtd 1 Rtd Rtd Pt Dt
where we have used Rtd (i) = Rtd for all i (analogous to the loan branches).
8.1.4 Balance sheet for the bank sector

The full balance sheet of the banking sector is then given by
T OT
Bt = BF;t + KtB ; (171)
T OT
where Bt is total assets (total lending). On the liability side, BF;t is total external bank funding and KtB is bank capital
(equity). Total external bank funding is the sum of household deposits and foreign debt:
T OT
BF;t = Dt + Bt : (172)
Total lending is the sum of lending to entrepreneurs and households:
Bt = Be;t + Bh;t : (173)

Jet = (RtF eh;t + (Re
1)B t
ee;t
1)B (Rtd et
1)D (Rt e
1)Bt
et F ! B ;
B t (174)
eB
K Jet
e B = (1
K b
) t 1
+
1
t z z; (175)
t t t t
e T OT
Rtab BF;t
!B
t = ; (176)
1 B
t
et
RtA B
Det Bet
Rtab = Rtd (i) + Rt ; (177)
e T OT
B e T OT
B
F;t F;t
eh;t
B ee;t
B
RtA = RtF + Rte ; (178)
Bet Bet
27
F !B
t ; (179)
f !B
t ; (180)
" #
e tB
K
Rtb Rt = F !B
t f !B
t !B
t : (181)
et K
B e tB
By de…ning
St Pt
Set = ; (182)
Pt
we can write total foreign debt for the home country as
e T OT = Rt B
B e T OT + Set PeM M
f Set PeO e
;t YO;t PeR;t M
fO ;t PetM M
ft : (183)
t z t 1 t t
t t
Private foreign debt:
et = B
B etT OT + B
eF;t : (184)
UIP:
" #
Rt t+1Set+1 h B
i
Et 1 t = 1; (185)
Rt t+1 Set
exp B2 etT OT
B ess
B T OT
1
B B1
t = ztB : (186)
exp B2 etT OT
B ess
B T OT +1
8.2.2 Loan branch

FOC
w.r.t. RtF :
" 2
#
IH IH Rtb F RtF RtF F
F
Rt+1 F
Rt+1 e
Bh;t+1
z
1 t + t 1 + Et 1 t+1 t+1 = 0: (187)
RtF RtF 1 RtF 1 RtF RtF eh;t
B
w.r.t. Rte :
" #
e
b
e Rt e Rte Rte e
e
Rt+1 e
Rt+1 2 ee;t+1
B
z
1 t + t e 1 + Et 1 t+1 t+1 = 0: (188)
Rt Rte 1 Rte 1 Rte Rte ee;t
B

FOC w.r.t. Rtd :
" 2
#
D D Rt D Rtd Rtd D
d
Rt+1 d
Rt+1 Dt+1e
z
(1 t ) t 1 + Et 1 t+1 t+1 = 0: (189)
Rtd Rtd 1 Rtd 1 Rtd Rtd et
D
8.2.4 Balance sheet
eF;t
B T OT e tB = B
+K et ; (190)
et = B
B ee;t + B
eh;t ; (191)
eF;t
B T OT et + B
=D et : (192)
28
The following equations are included in the model …le, (174), (175), (176), (177), (178), (181), (183), (184), (185), (186),
(187), (188),(189), (190), (191), (192), (179) and (180).

Jess = (Rss
F eh;ss + (Rte
1)B ee;ss
1)B (Rtd e ss
1)D (Rt ess
1)B ess F ! B
B ss ; (193)
" # 1
b
e (1 )
B
Kss = 1 z
Jess ; (194)
ss ss
ab e T OT
Rss BF;ss
!B
ss = ; (195)
(1 ss
e
B ) RA B
ss ss
d e ess
ab Rss Dss + Rss B
Rss = ; (196)
Be T OT
F;ss
eh;ss
B e
A F e Be;ss
Rss = Rss + Rss ; (197)
Bess Bess
F !B
ss ; (198)
f !B
ss ; (199)
" #
e ss
K B
b
Rss Rss = F !B
ss f !B
ss !B
ss : (200)
ess
B eB
K ss
Current account:
1
ess Rss
B T OT
= 1 z
Sess PeM f
;ss Mss Set PeO e
;ss YO;ss Pess
R e f
St MO ;ss PeM;ss M
fss : (201)
ss ss
Private foreign debt:
ess = B
B ess
T OT eF;ss :
+B (202)
UIP:
Rss Rss
= ; (203)
ss ss
B B
ss = zss = 0: (204)
8.3.2 Loan branch

From the FOC w.r.t. RtF , we see that the lending rate to housholds will be set as a mark up on the wholesale lending rate
in steady-state, i.e.
IH
F b ss
Rss = Rss :IH
(205)
1 ss
From the FOC w.r.t. Rte ; we see that the lending rate to entrepreneurs will be set as a mark up on the wholesale lending
rate in steady-state, i.e.
e
e ss b
Rss = e Rss : (206)
ss 1

From the FOC w.r.t. Rtd , we see that the deposit rate will be set as a mark down on the money market rate in steady-state,
i.e.
D
d ss
Rss = D
Rss : (207)
( ss 1)
29
8.3.4 Balance sheet
ess = B
B e T OT + K
eB; (208)
F;ss ss
ess = B
B ee;ss + B
eh;ss ; (209)
eF;ss
B T OT e ss + B
=D ess : (210)
9 Oil sector
9.1 Maximization
9.1.1 Supply …rms
A continuum of oil supply …rms, indexed r; combine …nal goods QO;t (r), labor from households LO;t (r) and utilized capital
rented from entrepreneurs K O;t (r) to produce a good YR;t (r) that is used for oil investments by an extraction …rm and
exports to a foreign oil extraction …rm. PtQO is the price of QO;t (r) – as it is a …nal good we have that PtQO = Pt . The
wage earned by households working in the oil supply sector is WO;t (equal to Wt because of perfect labor mobility), while
the rental price of utilized capital is RKO;t (equal to RK;t due to perfect mobility of capital).
The production function is as follows:
q 1 q l
YR;t (r) = ZR;t QO;t (r)(Zt LO;t (r)) l K O;t (r); (211)
where q is the …nal goods share, l is the labor share and 1 q l is the capital share in production. ZR;t is an exogensous
QO
shock, assumed to follow an AR process. Minimizing costs (Pt QO;t (r) + WO;t LO;t (r) + RKO;t K O;t (r)); subject to (211)
gives rise to the following conditional demand functions and marginal cost function (as in section 3):
! 1
PtQO
QO;t (r) = q YR;t (r); (212)
M CR;t
1
WO;t
LO;t (r) = l YR;t (r); (213)
M CR;t
1
RKO;t
K O;t (r) = (1 q l) YR;t (r); (214)
M CR;t
! q 1
1 PtQO WO;t l
RKO;t q l
M CR;t = :
ZR;t q l 1 q l
In symmetric equilibrium all …rms make the same decisions, so QO;t (r) = QO;t ; LO;t (r) = LO;t ;and K O;t (r) = K O;t .
Oil supply …rms sell their goods under monopolistic competition. Each …rm r charges di¤erent prices at home and abroad,
PtR (r) in the home market and PtR (r) abroad, where the latter is denoted in foreign currency. Dividends (which are paid
out to households) becomes:
t (r) = PtR (r) IOF;t (r) + PtR (r) St MO;t (r) M CR;t YR;t (r); (215)
where IOF;t (r) are goods delivered to the domestic extraction …rm, MO;t (r) are supply goods for exports and St is the
nominal exchange rate. YR;t = IOF;t (r) + MO;t (r):
In the same way as elsewhere in this document, it can be shown that supply …rm r faces the following demand functions,
R R
PtR (r) PtR (r) R
IOF;t (r) = PtR
IOF;t and MO;t (r) = PtR
MO;t ; from the domestic and foreign extraction sectors, where
and R are the elasticities of substitution between goods in the two markets respectively. Additionally, the costs of adjusting
prices in the domestic and the foreign markets are given by
PR 2
PtR (r) =PtR 1 (r)
P R;t (r) 1 ; (216)
2 PtR 1 =PtR 2
30
" #2
PR
PtR (r) =PtR 1 (r)
P R ;t (r) 1 (217)
2 PtR 1 =PtR 2
PR PR
respectively, where and govern the cost of adjusting prices.
The maximization problem becomes

8 R R
9
>
> PtR (r) PtR (r) >
>
>
> P R
(r) I OF;t + P R
(r) S t MO;t >
>
X1 >
<
t R
Pt " t PtR
# >
=
R R
s = s;t = M CR;t
PtR (r)
IOF;t + P R
PtR (r)
MO;t :
>
> PtR >
>
t=s >
> t >
>
>
: R R
>
;
P R;t (r)Pt IOF;t P R ;t (r)Pt St MO;t
Following the same procedure as in chapter 3, and using that in symmetric eq, PtR = PtR (r) and PtR = PtR (r) ; the FOC
w.r.t. PtR is given by
R R IOF;t PR PtR =PtR 1 PtR =PtR 1

IOF;t IOF;t + M CR;t 1 IOF;t
PtR PtR 1 =PtR 2 PtR 1 =PtR 2
R
PR Pt+1 =PtR R
(Pt+1 =PtR )2
+Et 1 IOF;t+1 = 0; (218)
Pt =PtR 1
R Pt =PtR 1
R
w.r.t. PtR is given by
" #
R R
MO;t PR PtR =PtR 1 PtR =PtR 1
St MO;t St MO;t + M CR;t 1 St MO;t
PtR PtR 1 =PtR 2 PtR 1 =PtR 2
( " # 2 )
R
M
R
Pt+1 =PtR Pt+1 =PtR
+Et 1 St+1 MO;t+1 = 0: (219)
PtR =PtR 1 PtR =PtR 1
9.1.2 Extraction …rm, domestic

The domestic oil extraction …rm is also a producer of rigs. It buys oil supply goods from the oil supply sector, which is
abbreviated IO;t . This good is then used to produce rigs FO;t . Rigs depreciate with a constant rate O , and are subject to
a degree of utilization UF;t . There will be a tradeo¤ between raising the utilization rate (by buying more supply goods) to
increase oil production, and to decrease it to reduce the wear and tear of the rigs. This unit cost of increasing the utilization
rate is measured in oil supply goods, and represented by the function a(UF;t ). Total demand for supply goods from the
domestic extraction …rms is then given by
IOF;t = IO;t + a(UF;t )FO;t 1: (220)

The oil production is given by YO;t , which is exported at a price PO ;t in foreign currency (see chapter 10 equation (289) for
more on the oil price). This means that the oil price in home currency is given by St PO ;t . The problem at period s will
then be
1
X
max s;t St PtO YO;t PtR IOF;t ; (221)
fYO;t ;FO;t ;IO;t ;UF;t g
t=s
where s;t is the stochastic discount factor between period s and t and St is the nominal exchange rate.
Rigs accumulate according to:
O IO;t
FO;t = (1 )FO;t 1 + ZIOIL;t 1 O IO;t ; (222)
IO;t 1
I
O;t
where O IO;t 1
represents the costs of changing investment levels (de…ned in (231)) and ZIOIL;t is an oil invenstment
productivity shock, assumed to follow an AR process. “E¤ective rigs usage” is de…ned as
F O;t = FO;t 1 UF;t ; (223)
31
and the production function is Cobb-Douglas, i.e.
YO;t = ZO;t (F O;t ) o (Ot )1 o

; (224)
where ZO;t is oil extraction productivity shock that follows an AR process, o is the rigs share and Ot is oil in the ground
(which may follow an AR process).
The domestic extraction …rm maximizes pro…ts subject to (222), (223), (220) and (224), taking pro…ts as given. Inserting
from (223), (224), (220), the Lagrangian becomes:
1
" 1
#
X St PtO Z
h O;t (FO;t 1 UF;t ) Ot
o o
PtR (IO;t
h + a(UF;t )FO;t i1 ) i
L(fYO;t ; FO;t ; IO;t ; UF;t g) = s;t O IO;t ; (225)
O;t FO;t (1 )FO;t 1 ZIOIL;t 1 O IO;t 1 IO;t
t=s
where O;t is the Lagrange multiplier for the rigs accumulation constraint, (222). FOC
w.r.t. FO;t :
O 1 1
o St+1 Pt+1 ZO;t+1 (FO;t UF;t+1 ) Ot+1 FO;t
o o
O
t =E R
Pt+1 a(UF;t+1 ) + (1 O ) O;t+1
()
h i
O 1 R
O;t = E o St+1 Pt+1 YO;t+1 FO;t Pt+1 a(UF;t+1 ) + (1 O) O;t+1 : (226)
w.r.t. IO;t :
h 0
i
IO;t IO;t IO;t
O;t ZIOIL;t 1 O IO;t 1 IO;t 1 O IO;t 1
PtR = 0 IO;t+1 IO;t+1
2 : (227)
+E O;t+1 ZIOIL;t+1 O IO;t IO;t
w.r.t. UF;t :
O YO;t 0
o St Pt = PtR a (UF;t )FO;t 1: (228)
UF;t
The cost of increasing the rigs utilization rate is:
0 uf
0 a (UF;ss )
a(UF;t ) = a (UF;ss )(UF;t 1) + (UF;t 1)2 ; (229)
2
which means that
0 0 0
uf
a (UF;t ) = a (UF;ss ) + a (UF;ss ) (UF;t 1): (230)
Furthermore, the costs of changing investment levels are
RI 2
IO;t IO;t z
O = t : (231)
IO;t 1 2 IO;t 1
It follows that
0 IO;t RI IO;t z
O = t : (232)
IO;t 1 IO;t 1
uf
The cost of changing the utilization rate is governed by the parameter , while the cost of adjusting the oil investment
level is governed by the parameter RI .
9.1.3 Extraction …rm, abroad

The foreign extraction …rm produces oil, YO ;t ; invests, IO ;t ; and imports oil supply goods from the home country’s oil
supply sector, MO ;t : It has the following production function:
YO ;t = MOo ;t IOio;t (O ;t )1 io o
: (233)
where O ;t is oil in ground (and may be set to a shock process following an AR process, otherwise constant), and o is the
share of oil supply goods from home used in production.
Maximizing pro…ts:
32
1
X PtR
max s;t PtO YO ;t MO ;t PtIO IO ;t ; (234)
fYO ;t ;MO ;t ;IO ;t g
t=s
St
s.t. (233), where s;t is the foreign stochastic discount factor between period s and t.
FOC w.r.t. MO ;t (the demand for oil supply goods from abroad):
1
PtR
MO ;t = o YO ;t ; (235)
St PtO
where YO ;t is an exogenous shock and is assumed to follow an AR process.
9.1.4 Oil fund

The sovereign wealth fund (often referred to as “the oil fund”) accumulates according to:
Pt 1 PtO
BF;t = Rt BF;t 1 + St YO;t GC;t ; (236)
Pt Pt
where BF;t is the claim on foreign assets held by the government due to the income coming from the oil sector, i.e. the oil
fund. We assume here that the petroleum tax rate is 100%. GC;t is the amount (in real terms) used from the oil fund each
period, and is transferred to the government as a lump sum transfer. This is the same as saying that the lump sum taxes is
cut with the same amount, and therefore, it is as if the amount is given directly back to households as lump-sum transfers
(i.e. part of DIVt in the household budget balance).

9.2.1 Supply …rms
Production function:
q l 1 q l
YR;t QO;t Zt LO;t K O;t
= ZR;t
Zt Zt Zt Zt
()
YeR;t = ZR;t (Q e )1
e O;t ) q (LO;t ) l (K q l
; (237)
O;t
! 1
e O;t = PetQO
Q q YeR;t : (238)
g
M C R;t
e O;t is a …nal good, so PetQO = 1:
We assume that Q
! 1
WfO;t
LO;t = l YeR;t ; (239)
g
M C R;t
! 1
e eKO;t
R
K O;t = (1 q l) YeR;t : (240)
g
M C R;t
Optimal prices:
e
R IOF;t
R R
IeOF;t Re
IOF;t g
+M C R;t PR t
1 t e
IOF;t
PetR R
t 1
R
t 1
R
PR t+1 ( R 2
t+1 ) e
+Et R
1 R
IOF;t+1 zt+1 = 0; (241)
t t
MO;t R R
Set M
fO;t R
Set M
fO;t + M
g C R;t R PR t
1 t
Set M
fO;t
PetR R
t 1
R
t 1
R R 2
M t+1 ( t+1 ) e fO;t+1 zt+1
+Et R
1 R
St+1 M = 0: (242)
t t
33
9.2.2 Extraction …rms, domestic
As the oil sector has dimishing return to scale, the stochastic trend level in this sector is Zt o . We assume in this model that
o
Zt+1
the value of the oil production is stationary, which means that the stochastic trend level in the oil price is Zt+1 . Therefore
PtO Zt o
we de…ne the stationary real oil price as PetO = Pt Zt . By using this we get the following stationary solution:
o
YO;t F O;t
= ZO;t (Ot )1 o
Zt o Zt
=)
e
YeO;t = ZO;t F
o
(Ot )1 o
; (243)
O;t
e FeO;t 1
F O;t = z UF;t : (244)
t
By de…nition
1
IeOF;t = IeO;t + a(UF;t )FeO;t 1 z: (245)
t
FOC extraction …rms:
O R
O;t Pt+1 St+1 Pt+1 Pt+1 Zt+1
o
YO;t+1 Zt Zt+1 Pt+1 O;t+1
=E o a(UF;t+1 ) + (1 O)
Pt Pt Pt+1 Pt+1 Zt+1 FO;t Zt+1 o
Zt Pt+1 Pt+1
,
" !#
e
e O;t = E t+1
e eO YO;t+1
o St+1 Pt+1
z
t+1 Pet+1
R
a(UF;t+1 ) + (1 e
O ) O;t+1 ; (246)
FeO;t
" ! !#
IO;t IO;t IO;t
0
O;t Zt Zt Zt Zt Zt Zt
Pt ZIOIL;t 1 O IO;t 1 Zt 1 IO;t 1 Zt 1 O IO;t 1 Zt 1
PtR 2 Zt 1 Zt 1
!
Zt 1
!2 3
= IO;t+1 IO;t+1
Pt Pt+1 0 Zt+1 Zt+1
+E 4 5
O;t+1 Zt+1 Zt+1
Pt Pt+1 ZIOIL;t+1 O IO;t Zt IO;t Zt
Zt Zt
,
h i
e O;t ZIOIL;t 1 0 IeO;t z IeO;t z IeO;t z
O IeO;t 1 t IeO;t 1 t O IeO;t 1 t
PetR = IeO;t+1 IeO;t+1
2 ; (247)
+E t+1
e O;t+1 ZIOIL;t+1 0
z z
O IeO;t t+1 IeO;t t+1
St Pt PtO Zt o YO;t PR 0 FO;t 1 Zt 1

o = t a (UF;t )
Pt Pt Zt Zt UF;t
o
Pt Zt 1 Zt
e eO YeO;t 0 FeO;t
= PetR a (UF;t )
1
o St Pt z ; (248)
UF;t t
0 uf
0 a (UF;ss )
a(UF;t ) = a (UF;ss )(UF;t 1) + (UF;t 1)2 ; (249)
2
0 0 0
uf
a (UF;t ) = a (UF;ss ) + a (UF;ss ) (UF;t 1); (250)
! " #2
IeO;t z
RI
IeO;t z z
O t = t ss ; (251)
e
IO;t 1 2 e
IO;t 1
! " #
0 IeO;t z RI IeO;t z z
O t = t ss : (252)
IeO;t 1 IeO;t 1
34
9.2.3 Producer of rigs
FO;t O FO;t 1 Zt 1 IO;t Zt 1 Zt IO;t
= (1 ) + ZIOIL;t 1 O
Zt Zt 1 Zt IO;t 1 Zt Zt 1 Zt
" !#
e
O FO;t 1 IeO;t z
FeO;t = (1 ) + ZIOIL;t 1 O t IeO;t : (253)
IeO;t 1
z
t
9.2.4 Extraction …rm abroad

Lets de…ne Z ;t as the stochastic trend level abroad. To get a stationary solution we must assume that Z ;t = Zt . This leads
to
0 1 1
PtR
MO ;t B Pt C YO ;t
= ao @ o + io A + io :
Zt P PO Z ;t Z o
;t
St Ptt Pt Zt
t
We must assume a Cobb-Douglas production function for the foreign extraction …rm and that o + io = o , (where o
and io are oil investment shares in the production function of the foreign extraction …rm, see (233), and o is the rigs
share in the domestic extraction …rm, see (243)), or else we will not get a well-de…ned stationary model. Using this we get
that
0 1 1
PtR
MO ;t YO ;t
= ao @ P PPO t
Z o
A
Zt St Pt P Zt t
t t Zt o
t
! 1
fO PetR
M ;t = ao YeO ;t : (254)
Set PetO
9.2.5 Oil fund

eF;t = Rt B
B e + Set PetO YeO;t e C;t :
G (255)
z F;t 1
t t

The following equations are included in the model …le, (237), (238), (239), (240), (241), (242), (243), (244), (245), (246),
(247), (248), (249), (250), (251), (252), (253), (254), and (255).

9.3.1 Supply …rms
YeR;ss = (Q e
e O;ss ) q (LO;ss ) l (K 1
O;ss ) : (256)
q l
Marginal cost function,

! q
! l
!1 q l
g Pess
QO fO;ss
W eKO;ss
R
M C R;ss = : (257)
q l 1 q l
Factor demand:
! 1
e O;ss = Pess
QO
Q q YeR;ss ; (258)
g
M C R;ss
! 1
WfO;ss
LO;ss = l YeR;ss ; (259)
g
M C R;ss
35
! 1
e eKO;ss
R
K O;ss = (1 q l) YeR;ss : (260)
g
M C R;ss
Optimal prices:
R
Pess
R g
=M C R;ss R
; (261)
( 1)
g
M C R;ss R
Pess
M
= : (262)
Sess R
1
9.3.2 Extraction …rms, domestic

e
YeO;ss = ZO;ss F
o
(Oss )1 o
; (263)
O;ss
ZO;ss = constant and Oss = constant, (264)
e FeO;ss
F O;ss = z
: (265)
ss
FOC extraction …rms:
!
e O;ss = e eO YeO;ss
ss ss o Sss Pss
z
ss Pe;ss
R
a(UF;ss ) + (1 O)
e O;ss ; (266)
FeO;ss
UF;ss = 1 and a(UF;ss ) = 0; (267)

h i
e O;ss ZIOIL;ss 1 0 IeO;ss z IeO;ss z IeO;ss z
O IeO;ss ss IeO;ss ss O IeO;ss ss
PetR = 2 ; (268)
e 0 IeO;ss z IeO;ss z
+ ss ss O;ss O IeO;ss ss IeO;ss ss
0
z z
ZIOIL;ss = 1, O ( ss ) = 0 and O ( ss ) = 0; (269)
e eO YeO;ss R 0 FeO;ss
o Sss Pss = Pess a (UF;ss ) z ; (270)
UF;ss ss
IeOF;ss = IeO;ss : (271)
9.3.3 Producer of rigs

" !#
FeO;ss IeO;ss
FeO;ss = (1 O
) + ZIOIL;ss 1 O
z
ss IeO;ss : (272)
z
ss IeO;ss
9.3.4 Oil price

Pess
O
= constant. (273)
9.3.5 Extraction …rms abroad

! 1
fO Pess
R
M ;ss = ao YeO ;ss ; (274)
Sess Pess
O
YeO ;ss = constant. (275)
36
9.3.6 Oil fund
eF;ss = Rss e
B z
BF;ss + Set PeO e
;ss YO;ss
e C;ss ;
G (276)
ss ss
e C;ss = Set Pess

O e Rss eF;ss :
G YO;ss (1 z
)B (277)
ss ss
10 Foreign sector
As the intermediate sector abroad is symmetric to the intermediate sector home we can in the same way as in section 3
derive the optimal price setting rule for the imported real price PetM (that goes into the …nal good sector):
ft
M M M
ft
M F f
+ Set M
g F PM t t ft
t Mt Ct t 1 M
PetM M
t 1
M
t 1
( )
PM
M
t+1 ( M 2
t+1 ) f z Set
+Et 1 M t+1 t+1 = 0; (278)
M
t
M
t Set+1
1
where is the foreign stochastic discount factor in stationary terms (and assumed equal to (Rt ) for simplicity), P M is
a parameter that captures the cost of changing the price of exported goods from home and F t is the substitutition elastisity
between imported goods from home. In steady-state we get that
F
Pess
M
= F
ss
Sess M
g C ss : (279)
ss 1
Marginal costs abroad is a shock and follow an exogenous AR process. The demand from (the …nal goods sector) abroad for
home exports facing the domestic intermediate sector is given by (again symmetric to the …nal goods sector at home):
ft = (1
M t) PetM YeN AT;t ; (280)
where t is the domestic share abroad, assumed to follow an AR process. YN AT;t is output abroad. In steady-state we get
that
f = (1
M Pess
M
YeN AT;ss :
ss t) (281)
Foreign output, money market interest rates, in‡ation and the international oil price are modeled as a block exogenous
system of equations, based on a simple New Keynesian model with added backward looking terms to add more dynamics
and realism. Foreign output is devided into trading partners (a prede…ned list of Norway’s closest trading partners) and
non-trading partners (the rest of the world). The model variables are in gap form and stationary.
\
The output gap for trading partners (Ye ) is partly backward looking (controlled by a parameter Y ), and partly equal
N AT;t
\
to YeF N AT;t (de…ned below) by (1 ). Additionally it is a¤ected negatively by the oil price gap (Pd
Y O
t ), as this increases
\
costs, and positively by the output gap among non-trading partners, YeNNAT;t
T P ( O and Y N T P are positve parameters):
\ \ \ \
YeN AT;t = Y
YeN AT;t 1 + (1 Y
)YeF N AT;t O
Pd
O +
t
Y NT P
YeNNAT;t
TP + z
[U ;t : (282)
z[ e\
U ;t is a shock that follows an AR process and YF N AT;t is speci…ed as a dynamic IS curve:
\ \
YeF N AT;t = YeF N AT;t+1 R ct
(R d );
t+1 (283)
\
where R
relates the real interest rate to output. Output gap for non-trading partners, YeNNAT;t
T P ; is assumed to follow:
\ \ \
YeNNAT;t
TP = Y NT P
YeNYAT;t
NT P
1
ON T P
Pd
O +
t
Y NT P
YeN AT;t + zY\
N T P;t : (284)
Y NT P
where zY\
N T P;t is shock, and (2 [0; 1]), ON T P (2 (0; 1)) and Y N T P (2 (0; 1)) are parameters. The total global
output gap is a weighted sum of trading partners and non-trading partners’output:
\ GLOB e\ \
YeNGLOB
AT;t = YN AT;t + (1 GLOB
)YeNNAT;t
TP ; (285)
37
GLOB
where is the weight on trading partners output gap in the global output gap. The in‡ation gap for trading partners
is given by
ct = P d + (1
t 1
P
)d
F;t +
OP
Pd
O +z
t \ H ;t ; (286)
where some agents are backward looking (controlled by a parameter P ), OP is a positive parameter pickking up the e¤ect
that increasing real oil prices increase real marginal cost of …rms amount trading partners, z\
H ;t is a shock that follows an
d
AR process and F;t is speci…ed according to a Phillips curve:
\
d =
F;t
P \ +
F;t+1
Y
YeN AT;t ; (287)
where P and Y are parameters.The foreign monetary policy rate (equal to the money market interest rate) is given by
a Taylor rule with smoothing:
ct = ! R R \
R [ t 1 + (1 ! R ) ! P ct + ! Y YeN AT;t + z[
R ;t ; (288)
R
where z[
R ;t is a shock that follows an AR process, the parameter ! governs interst rate smoothing, and ! P and ! Y are
weights on in‡ation and output respectively. Lastly, the oil price gap is given by
O e\
Pd
O =
t
O[O
Pt+1 + YNGLOB
AT;t + z\
P O ;t ; (289)
O O
where z\
P O ;t is a shock that follows an AR process. and are parameters.
10.1 Equations included in the model

The following equations are included in the model …le, (278), (280), (282), (283), (286), (287), (288) and (289).
11 Market clearing
Intermediate goods market:
Tt = Qt + Mt : (290)
Final goods market:
At = Ct + IC;t + IH;t + Gt + QO;t : (291)

Total investment:
It = IC;t + IH;t : (292)

Capital goods sector:
K t = K O;t + K I;t : (293)

Labor market:
Lt = LO;t + LI;t : (294)

Oil supply sector:
YR;t = IOF;t + MO ;t : (295)
38
Tet = Q
et + M
ft : (296)
Final goods market:
et = C
A et + IeC;t + IeH;t + G
et + Q
e O;t : (297)
Total investment:
Iet = IeC;t + IeH;t : (298)

e =K
K e e
t O;t + K I;t : (299)
Labor market:
Lt = LO;t + LI;t : (300)

Oil supply sector:
YeR;t = IeOF;t + M
fO ;t : (301)

The following equations are included in the model …le, (296), (297), (298), (299), (300) and (301).

Tess = Q
e ss + M
fss : (302)
Final goods market:
ess = C
A ess + IeC;ss + IeH;ss + G
e ss + Q
e O;ss : (303)
Total investment:
Iess = IeC;ss + IeH;ss : (304)

e =K
K e e
ss O;ss + K I;ss : (305)
Labor market:
Lss = LO;ss + LI;ss : (306)

Oil supply sector:
YeR;ss = IeOF;ss + M
fO ;ss : (307)
12 Monetary policy
Monetary policy can either follow a Taylor type rule:
!!Y !1 !R
YeN AT;t
!P
!R t
Rt = (Rt 1) Rss eZRN 3M;t ; (308)
ss e
YN AT;ss
where ! R governs interest rate persistence and ! P and ! Y are the weights on in‡ation and output respectively, while ZRN 3M;t
represents a monetary policy shock that follows an AR process, or it can minimize a loss function (either under commitment
or discretionary policies), i.e.
39
1
" #
X b
2 2 2
Ye N AT;t bP;t bP;t
t s 2 Y EAR
min p (bpol;t ) + y + dr 4R + lr R ; (309)
bP;t g
fR t=s
where p is the central bank’s discount factor, x bP;t is the key policy rate
bt denotes a variable deviation from steady-state, R
b
gap and Ye N AT;t is the output gap (see next section). Furthermore, the annualized key policy rate change gap is de…ned as
bP;t = 4 R
4R bP;t bP;t
R 1 ; (310)
the annualized key policy rate gap is de…ned as
bP;t
R Y EAR bP;t ;
= 4R
and the 4-quarter in‡ation rate gap is given by
zinf;t
bpol;t = bt + bt 1 + bt 2 + bt 3 + log ; (311)
zinf;ss
where zinf;t is a monetary policy preference shock that follows an AR process. y; dr and lr are the corresponding weights
in the loss function.
13 Extra de…nitions
13.1 Interest rates
The key policy rate, RP;t , is a product of the money market interest rate, Rt , and the money market risk premium, Zprem;t
(which is assumed to be a shock that follows an AR process):
RP;t = Rt Zprem;t : (312)
13.2 Prices
In‡ation in home country:
Pt
t : (313)
Pt 1
In‡ation abroad:
Pt
t :
Pt 1
Imported in‡ation:
M PetM
t = t : (314)
PeM t 1
Exported in‡ation:
M PetM
t = t : (315)
PeM t 1
Domestic in‡ation:
Q PetQ
t = t : (316)
PeQ t 1
Oil supply goods domestic in‡ation:
R PetR
t = t : (317)
PeR t 1
Oil supply goods export in‡ation:
40
R PetR
t = t : (318)
PeR
t 1
House price in‡ation:
H PetH h
t = t t: (319)
PeH
t 1
fI;t = W
Wage in‡ation (W fO;t = W
ft ):
ft
W z
W;t = t t: (320)
f
Wt 1
Oil supply sector wage in‡ation:
W O;t = W;t : (321)

Intermediate sector wage in‡ation:
W I;t = W;t : (322)

4-quarter in‡ation:
3
X
bYt EAR = bt i : (323)
i=0
4-quarter in‡ation abroad,

3
X
bt Y EAR = bt i : (324)
i=0
4-quarter in‡ation for imported goods:

3
X
bM;Y
t
EAR
= bM
t i: (325)
i=0
4-quarter in‡ation for exported goods:

3
X
bM
t
;Y EAR
= bM
t i: (326)
i=0
13.3 Variables in CPI units

To aggregate variables we need them to be given in same unit of account. We choose to cast all variables in CPI units. The
intermediate goods export is then given by
eI
X e eM Mf ;t :
N AT;t = St Pt (327)
The oil supply goods export:
eN
X O e eR f
AT;t = St Pt MO ;t : (328)
Total export,
eN AT;t = X
X eNI eO
AT;t + XN AT;t : (329)
Total import, with measurement error/shock (that follows an AR process):
M ft + log( zm;t ):
fN AT;t = PetM M (330)
zm;ss
Oil investment:
IeN
OIL eR e
AT;t = Pt IO;t : (331)
41
Oil production:
g N AT;t = Set PetO YeO;t :

OIL (332)
Oil supply goods:
YeR;N AT;t = PetR YeR;t : (333)

Output (mainland economy) is then given by
zx;t
YeN AT;t = A
et e O;t + X
Q eN AT;t fN AT;t + IeN
M OIL
AT;t + log ; (334)
zx;ss
where zx;t is an inventory shock to the mainland economy, that follows an AR process.Total output is then given by
YeNOIL e g
AT;t = YN AT;t + OILN AT;t : (335)
13.4 Others
Credit over GDP gap:
bY;t = B
B bt YbN AT;t : (336)
House prices over nominal income gap:
d t = PbtH
QH ct + L
(W b t ): (337)
14 Measurement equations
The following equations measure the growth rate gaps of key variables. We do not include measurement errors. (Note that
4 does not relate to the variable , where the latter being the stochastic discount rate.)
!
Cet z
4C et = log + log t
; (338)
Cet 1 z
ss
!
Get z
4G e t = log + log t
; (339)
Get 1 z
ss
!
e IeC;t z
t
4IC;t = log + log ; (340)
IeC;t 1 z
ss
!
IeH;t z
4IeH;t = log + log t
; (341)
IeH;t 1 z
ss
!
e YeN AT;t z
t
4YN AT;t = log + log ; (342)
YeN AT;t 1 z
ss
!
Mft z
4Mft = log + log t
; (343)
f
Mt 1 z
ss
!
Mft z
f
4Mt = log + log t
; (344)
Mft 1 z
ss
!
ft
W z
4Wft = log + log t
: (345)
f
Wt 1 z
ss
42
15 Shock processes
There are various shocks in the model. All are assumed to be AR(1) processes, where the ’s govern the persistence of the
processes (i.e. autocorrelation), the ’s are normally distributed white noise innovations and the ’s are parameters governing
the standard deviations of the respective shocks. Most shock processes are modeled as deviations from steady-state. The
shocks included in the model are the following.
House price stochastic trend in‡ation shock:

h h h
log( t) = (1 h ) log( ss ) + h log( t 1) + h ;t h : (346)
Shock to productivity in in the intermediate sector:
log(ztL ) = (1 L
z L ) log(zss ) + zL log(ztL 1 ) + z L ;t z L : (347)
Stochastic trend growth shock:

z z z
log( t) = (1 z ) log( ss ) + z log( t 1) + z ;t z : (348)
Government expenditure shock:
e t ) = (1
log(G G ) log(Gss )
e + G
et
log(G 1) + G;t G : (349)
Shock to the foreign preferences for home goods (export shock):
log( ;t ) = (1 ) log( ;ss ) + log( ;t 1 ) + ;t : (350)
Oil in the ground shock:
log(Ot ) = (1 O ) log(Oss ) + O log(Ot 1) + O;t O : (351)
Shock to a parameter that can be mapped to the loan to value ratio, see (418):
ent ent ent
log( t ) = (1 ent ) log( ss ) + ent log( t 1) + ent ;t ent : (352)
Shock to a parameter that can be mapped to the loan to value ratio, see (485):
log( t ) = (1 ) log( ss ) + log( t 1) + ;t : (353)
Shock to the competition in the labor market:
log( t) = (1 ) log( ss ) + log( t 1) + ;t : (354)
Shock to the uncertainty in the banks’portfolio investment:

B B B
log( t ) = (1 B ) log( ss ) + B log( t 1) + B ;t B : (355)
Shock to banks’capital requirement:

B B B
log( t ) = (1 B ) log( ss ) + B log( t 1) + B ;t B : (356)
Shock to the competition in the deposit market:

D D D
log( t ) = (1 D ) log( ss ) + D log( t 1) + D ;t D : (357)
Shock to the competition in the loan market for the entrepreneurs:
43
log( et ) = (1 e ) log( e
ss ) + e log( e
t 1) + e ;t e : (358)
ft :
Shock to the competition in the market for exports M
F F F
log( t ) = (1 F ) log( ss )+ F log( t 1) + F ;t F : (359)
ft :
Shock to the competition in the market for imports M
F F F
log( t ) = (1 F ) log( ss ) + F log( t 1) + F ;t F : (360)
et :
Shock to the competition in the market for the domestic good Q
H H H
log( t ) = (1 H ) log( ss ) + H log( t 1) + H ;t H : (361)
Shock to the competition in the market for household lending:

IH IH IH
log( t ) = (1 IH ) log( ss ) + IH log( t 1) + IH ;t IH : (362)
Exogenous exchange rate risk premium shock:
ztB = (1 B
B )zss + B
B zt 1 + B;t B : (363)
Shock to the households preferences for deposits:
log(ztd ) = (1 d
d ) log(zss ) + d log(ztd 1 ) + d;t d : (364)
Shock to the productivity of oil investments:
log(ZIOIL;t ) = (1 IOIL ) log(ZIOIL;ss ) + IOIL log(ZIOIL;t 1) + IOIL;t IOIL : (365)
Shock to the households preferences for housing:
log(zth ) = (1 h
h ) log(zss ) + h log(zth 1 ) + h;t h : (366)
Shock to the house price:
log(zHS;t ) = (1 HS ) log(zHS;ss ) + HS log(zHS;t 1) + HS;t HS : (367)
Investment shock:
log(zI;t ) = (1 I ) log(zI;ss ) + I log(zI;t 1) + I;t I : (368)
Housing investment shock:
log(zIH;t ) = (1 IH ) log(zIH;ss ) + IH log(zIH;t 1) + IH;t IH : (369)
Monetary policy preference shock (when solved under optimal policy):
log(zinf;t ) = (1 rnf olio ) log(zinf;ss ) + rnf olio log(zinf;t 1) + inf;t inf : (370)
44
Shock to import:
log(zm;t ) = (1 m ) log(zm;ss ) + m log(zm;t 1) + m;t m : (371)
Oil price shock (in gap-form):
z\
P O ;t = PO zP\
O ;t 1 + P O ;t P O : (372)
Oil production shock abroad:
log(YeO ;t ) = (1 e
Y O ;t ) log(YO ;ss ) + Y O ;t log(YeO ;t 1 ) + Y O ;t Y O : (373)
Oil extraction …rms productivity shock:
log(ZO;t ) = (1 OIL ) log(ZO;ss ) + OIL log(ZO;t 1) + OIL;t OIL : (374)
Money market risk premium shock:
log(zprem;t ) = (1 prem ) log(zprem;ss ) + prem log(zprem;t 1) + prem;t prem : (375)
Oil supply …rms productivity shock:
log(ZR;t ) = (1 R ) log(ZR;ss ) + R log(ZR;t 1) + R;t R : (376)
Monetary policy shock (when solved with a Taylor rule):
log(zRN 3M;t ) = (1 RN 3M ) log(zRN 3M;ss ) + RN 3M log(zRN 3M;t 1) + RN 3M;t RN 3M : (377)
Shock to the households preferences for consumption:
log(ztu ) = (1 u
u ) log(zss ) + u log(ztu 1 ) + u;t u : (378)
Inventory shock:
log(zx;t ) = (1 wedge ) log(zx;ss ) + wedge log(zx;t 1) + wedge;t wedge : (379)
Shock to foreign money market interest rates (in gap-form):
z[
R ;t = R z\
R ;t 1 + R ;t R : (380)
Shock to output abroad, trading partners (in gap-form):
z[
U ;t = U z\
U ;t 1 + U ;t U : (381)
Shock to output abroad, non-trading partners (in gap-form):
zY\
N T P;t = Y N T P;t Y N T P : (382)
Shock to in‡ation abroad (in gap-form):
z\
H ;t = H z\
H ;t 1 + H ;t H : (383)
Shock to marginal costs abroad:
g
log(M C t ) = (1 MC
g
) log(M C ss ) + MC
g
log(M Ct 1) + M C ;t M C : (384)
45
16 The steady-state solution of the model
This chapter derives the steady-state solution of NEMO.
16.1 Calibration
We start with some calibrated steady-state values. As the Norwegian in‡ation target is 2.5%:
1
ss = (1:025) 4 = m;ss = m ;ss = q;ss = q;ss : (385)
Weighted foreign in‡ation is assumed to be 2%:

1
ss = (1:02) 4 : (386)
Average trend growth (technology growth) in Norway is assumed to be 1.75%:
1
z
ss = (1:0175) 4 : (387)
Nominal wage growth must be the sum of in‡ation and technology growth:
z
W;ss = W I;ss = W O;ss = ss ss : (388)
Quarterly house prices are assumed to grow by 1.1% above in‡ation:
h
ss = 1:011: (389)
Weighted foreign interest rates are assumed to be 4 %:
1
Rss (1:0404) 4 : (390)
Some calibrated shock variables in steady-state:
D
ss = constant; (391)
e
IH
F
F
H
H
;ss = constant; (399)
g
M C ss = constant: (400)
Government’s share of …nal goods net of …nal goods as inputs to the oil supply sector is assumed to be 100 og%:
e ss
G
og = = constant: (401)
ess
A Qe O;ss
The consumtion share of …nal goods net of …nal goods as inputs to the oil supply sector is assumed to be 100 oc%:
46
ess
C
oc = = constant: (402)
ess
A e O;ss
Q
The share of …nal goods used as input to the oil supply sector, is assumed to be 100 oq%:
e O;ss
Q
oq = = constant: (403)
ess
A
Exports as a share of …nal goods production is assumed to be 100 om%:
fss
M
om = = constant: (404)
ess
A
Deposits to total lending-ratio in the banking sector is assumed to be 100 od%:
e ss
D
od = = constant: (405)
ess
B
b
The spread between the wholesale lending rate (Rss ) and the money market inerest rate (Rss ) is assumed to be 100 spread%:
spread = constant: (406)

e
Maximum loan-to-value ratio for entrepeneurs is assumed to be 100 LT Vss %:
e
LT Vss = constant: (407)
Maximum loan-to-value ratio for households is assumed to be 100 LT Vss %:
LT Vss = constant: (408)

The stationary real price level of houses is to:
Pess
H
= 1: (409)
We also use that all adjustment costs are zero in steady-state.
16.2 Solution
B B
From the UIP condition (203) and from the de…nition of ss = zss = 0 (204) we get that
Rss
Rss = ss : (410)
ss
From de…nition of the key policy rate (312) and by assumption Zprem;ss = 1 we have that
RP;ss = Rss : (411)

From (207) we can see that the deposit branch sets the deposit rate as a mark-down on the money market rate in steady-state:
D;ss
D
Rss = D;ss
Rss : (412)
1
From the assumed premium (406) between the wholesale funding rate and the money market rate and from (200) we get
that
b
Rss = spread + Rss : (413)
b
From (205) we see that the loan branch sets the loan rate to households as a mark up on the wholesale rate, Rss , in
steady-state:
IH
F ss b
Rss = IH
Rss : (414)
ss 1
b
From (206) we see that loan branch sets the loan rate to entrepreneurs as a mark up on the wholesale rate, Rss , in steady-state:
e
e ss b
Rss = e Rss : (415)
1 ss
47
From the optimal total investment condition (134) we get that
1
Pess
K
= 0 = 1: (416)
ss
eK;ss , i.e. the real return on capital, but …rst we need to …nd the ess and ess . By using (122) we can
Next, we want to …nd R
e e Pss Be;ss
…nd ss by …xed-point iterations, and by using the assumed value of LT Vss K (1
Pss )Kss
and (121) we get the steady-state
loan to value ratio:
e 1 ent
e (1 ss ) 1 ss
LT Vss = 1 ent ss (417)
1+ ss
z
ss ss 1 + ent
ss
()
e ent 1
e 1 (1 ss ) 1+ ss
LT Vss = 1 ent z ent ; (418)
1+ ss ss ss ss ss
0 e
1
ent (1 ss )
1+ ss z
e @ ss ss A = 0;
1 LT Vss ent (419)
ss ss
ent
which means that we can …nd ss by …xed-point iterations of (419) until convergence. From the …rst-order condition w.r.t.
e
t (116) we get that
! ee;ss =
e ess B HELP 1 e
e ess ; (420)
where (remember that we can …nd the steady-state value of the stochastic discount factor from (39)), i.e.
" #
e;prime
HELP 1 ss 1 1 + entss
e = ; (421)
ss
where we de…ne
e e e
e;prime e e 1 e e e
= ( ss ) (1 ss ) ( ss ) + (1 ) : (422)
Rearrange the FOC w.r.t. Be;t (115):
h h e
i i
[1 e e
ss Rss ] Be;ss + ss
(1 ss )
ent 1 ! ee;ss ;
e ess B
h i h 1+ ss i
e e e e e
(1 ss )
z
ss ss
( e
ss ) (1 e
)ss (1 e
eess +
ss ) ( e
ss ) (1 e
) eess = 0 (423)
()
[1 R e
ss ss ] e
B e;ss + HELP 2 e e
e e ss Be;ss +
! HELP 3 e
e ess = 0;
where
e
HELP 2 (1 ss )
e = ss ent 1 ; (424)
1+ ss
h e
i
HELP 3 z e e
e =[ ss ss ss 1] ss (1 ) ; (425)
and we have used that

e 1 h e e
i
e e e e e
ss (1 ) = z
(1 ss ) ( ss ) (1 ) : (426)
ss ss
ee;ss from (420) into (423) to get that

e ess B
Insert for !
[1 e e
ss Rss ] Be;ss + HELP 2 HELP 1 e
e e ess + HELP 3 e
e ess =0
() (427)
1
eess = HELP 2 HELP 1
+ HELP 3
[1 e e
ss Rss ] Be;ss :
e e e
Insert this into (420):

HELP 1
e ess =
! e
HELP 2 HELP 1 + HELP 3
[ e
ss Rss 1] : (428)
e e e
Then by using (39), (428), e

ss ,
e
ss
e t ; (114) we get that
and FOC w.r.t. K
48
ent
eK;ss = 1 1
R (1 e ess
) ! ss
ss + ss : (429)
1 + ent
ss ss
From (117):
0
ss (uss )
eK;ss :
=R (430)
Then we use the demand function for Qt (93) and Mt (94) to …nd the steady-state values of real import and real domestic
prices.
fss = (1
M ) Pess
M ess
A
() (431)
1 1
fss
Pess
M
= 1
1 M
ess
A
=(404) 1
1
om ;
e ss =
Q Pess
Q ess
A
() (432)
1
e ss
Pess
Q
= 1Q
ess
A
:
Insert these expressions into the …nal goods production function (92) to get that
" 1 1 #
1 1 1
1 1
ess =
A Pess
Q ess
A + (1 ) (1 ) Pess
M ess
A
()
1 1 1
1= Pess
Q
+ (1 ) Pess
M (433)
()
1
1
1 (1 eM )
)(P 1
Pess
Q
= ss
:
From the FOC of optimal domestic price setting (78):

H
g ss 1 eQ
M C ss = H
Pss : (434)
ss
From the FOC of optimal imported price setting (279):

F
1 eM 1
Sess = F
Pss : (435)
g
M C ss
From the FOC of optimal exported price setting (79):
F
MgC ss
Pess
M
= ss
: (436)
F
ss
e
1 Sss
From the intermediate goods sector demand for labor (76):
!
1 g
M C ss
LI;ss = (1 ) l
zss Tess : (437)
fI;ss
W
From the intermediate goods sector demand for utilized capital (77):
!
e g
M C ss
K I;ss = Tess : (438)
eK;ss
R
The intermediate goods production function (75) results in:
1
1 1 1
Tess = (1 )
1
l
zss LI;ss
1
+
1
e
K : (439)
I;ss
49
Insert (438) and (??) into (439) to get:
2 1 3 1
1 1 g
6 (1 ) l
zss (1 ) l
zss M C ss
fI;ss Tess 7
6 W 7
Tess = 6 1 7
4 1 g 5
+ M C ss
eK;ss
R
Tess
()
2 1 3 1
1
l Mg C ss
6 (1 ) (1 ) zss f 7
6 W I;ss 7
1=6 1 7
4 1 g 5
M C ss
+ eK;ss
R
()
l 1 1 1
1 = (1 )
zss
+ 1 g
M C ss
fI;ss
W eK;ss
R
()
fI;ss 1 1 1
(1 )
W
l
g
= M C ss eK;ss
R (440)
zss
()
1
1 1
g
(M C ss ) (ReK;ss ) 1
fI;ss =
W l
zss :
1
l
Where zss = 1. From the wage setting rule by households (46):
fI;ss = W
W fss = ss ess );
M RS(Lss ; C (441)
ss 1
ss = constant. (442)
fss (from (441)):
At this stage we know W
ess ) = W
fss ss 1
M RS(Lss ; C : (443)
ss
2
To proceed, we need to switch our attention to the oil sector. First we assume that ZR;ss = 1, ZF;ss = 1, ZO;ss = 3,
Pss = 1:5, YeO ;ss = 1; Oss = 1. Given that Q
e O e O;t is bought from the …nal goods sector we have that
Pess
QO
= 1: (444)
From the production of rigs (272) we get:
FeO;ss z
ss
= : (445)
IeO;ss z
ss 1+ O
e
From the production function of the extraction …rm (263) and using that FeO;ss = F z
(265):
O;ss ss
! o
FeO;ss
YeO;ss = ZO;ss (Oss )1 o : z
(446)
ss
From the FOC of extraction …rms w.r.t. FtO (266), remember that we know ss and Sess :
!
e
e O;ss = e eO z YO;ss e
ss ss o Sss Pss ss + (1 O ) O;ss (447)
FeO;ss
=)
1
YeO;ss O + 1
= e O;ss
ss ss
: (448)
FeO;ss e eO
o Sss Pss
z
ss
From the FOC of extraction …rms w.r.t. IO;t (268):
50
Pess
R
= e O;ss : (449)
From the FOC of extraction …rms w.r.t. UF;t (270):
YeO;ss 1 R 0
= Pess a (UF;ss ): (450)
FeO;ss e eO
o Sss Pss
z
ss
=)
YeO;ss e O;ss a0 (UF;ss )

= : (451)
FeO;ss e eO zss
o Sss Pss
Combining (448) and (451) we get that
0 1
a (UF;ss ) = O + 1 : (452)
ss ss
From the supply …rm production function (256):
YeR;ss = (Q e
e O;ss ) q (LO;ss ) l (K 1
O;ss ) : (453)
q l
From (257), we get that marginal costs is get by

! q
! l
!1 q l
g Pess
QO fO;ss
W eKO;ss
R
M C R;ss = : (454)
q l 1 q l
Supply …rm factor demands ((258), (259) and (260)):
! 1
Qe O;ss Pess
QO
= q ; (455)
YeR;ss g
M C R;ss
! 1
LO;ss WfO;ss
= l ; (456)
YeR;ss g
M C R;ss
! 1
e
K eKO;ss
R
O;ss
= (1 q l) : (457)
e
YR;ss g
M C R;ss
Then, from market clearing in the oil supply goods market ((271) and (307)):
IeOF;ss = IeO;ss ; (458)
YeR;ss = IeOF;ss + M
fO ;ss : (459)
From perfect factor mobility we get that
fO;ss = W
W fss : (460)
From labor aggregation and wage aggreagation (306) we get that
Lss = LO;ss + LI;ss : (461)

Now we have 4 unknowns and 4 equations (453), (455), (456) and (457):
! ! !1
Qe O;ss q
LO;ss
l
e
K
q l
O;ss
1= ; (462)
YeR;ss YeR;ss e
YR;ss
! q
! l
!1 q l
g
M C R;ss g
M C R;ss g
M C R;ss
1= q l (1 q l) ; (463)
e QO
Pss f
WO;ss e
RKO;ss
q l (1 q l)
Pess fO;ss eKO;ss g
(1 q l) QO
1= q
q
l
l
(1 q l) W R M C R;ss ; (464)
51
q l 1 q l
g
M C R;ss = q
q l
(1 q l)
q+ l 1
Pess
QO fO;ss
W eKO;ss
R : (465)
l
e O;ss LO;ss
Q e
K O;ss
We can then solve for eR;ss , Y
Y eR;ss and eR;ss .
Y
From (261) and (262):
R
Pess
R g
=M C R;ss R
; (466)
( 1)
g
M C R;ss R
Pess
R
= : (467)
Sss R
1
From (448) we then get (since Pess

R
= e O;ss ) that
" # 1
FeO;ss
0
a (UF;ss )
= Pess
R
: (468)
YeO;ss e e
o Sss PO ;ss
z
ss
Then by using (445):
IeO;ss z O FeO;ss
=( ss 1+ ) : (469)
YeO;ss YeO;ss
We know Sess , Pess
O
, Pess
R
and YeO ;ss so from the demand from extraction …rms abroad we get that
fO Sess Pess
O
M ;ss = ao YeO ;ss : (470)
Pess
R
From (446), we …nd that

" ! o#1 1
FeO;ss
o
YeO;ss = ZO;ss Oss ; (471)

e
z Y
ss O;ss
e
which means we can back out FeO;ss , IeO;ss and get F O;ss from:
e FeO;ss
F O;ss = z
: (472)
ss
From (459) we can then back out YeR;ss , and we can therefore solve for K
e O;ss , LO;ss and Q
e O;ss . From the de…nition of oq
(403), we get that
e
ess = QO;ss :
A (473)
oq
fss ) can then be found from (94):
Imports (M
fss = (1
M ) Pess
M ess = omA
A ess ; (474)
e T OT = 0, (201) gives:
and if we assume that B ss
Sess Pess
M f
Mss = Pess
Mf
Mss Set Pess
O e
YO;ss Pess
R e f
St MO ;ss
() (475)
eM eO eR
fss =
M
P ss fss
M
P ss e
YO;ss
P ss fO
M ;ss :
ess P
S eM eM
P eM
P
ss ss ss
As all the variables on the right hand side are known at this point we have found the steady-state value of Mfss . Then
e ss . We can then substitute this value and M
by using (432) we get the steady-state value of Q fss into the market clearing
e
equation for the intermediate good (302) to …nd Tss , i.e.
Tess = Q
e ss + M
f :
ss (476)
e
As we now have Tess ; we can use (??) and (438) to …nd LI;ss and K I;ss respectively. So from (305) we get that
e =K
K e e
ss I;ss + K O;ss : (477)
52
By the de…nitions of utilized capital (119) we then have
K e
e ss = K z
ss ss ; (478)
i.e. we have found the aggregate capital stock in steady-state. Then, by using the expression for capital accumulation (132)
and the de…nition of capital adjustment cost (133):
e ss (1 )e
K = z
Kss + IeC;ss
ss
()
(1 )
IeC;ss = 1 z
e ss :
K (479)
ss
Then by using this and (133), we get that
IeC;ss zss z
ss = = ss 1 :
Ke ss
As we now know both LI;ss and LO;ss , we can …nd aggregate labor from (306):
Lss = LI;ss + LO;ss : (480)

To proceed, we can use the de…nition of MRS (47):
ess ) = v 0 (Lss )
M RS(Lss ; C e0 (C
u ess )
() (481)
ess = v 0 (Lss )
e0 C
u M RS(L ;C e )
:
ss ss
ess , and therefore by using (35):

By using (402) we can …nd C
u
zss ess u
=C ess :
e0 C (482)
The government expenditure can be found by using the de…nition of og (401):
e ss = og(1
G ess :
oq)A (483)
We now switch our attention to the households FOC’s. By using (49), we can …nd B ss by …xed-point iterations, and by
Pss Bh;ss
using the de…nition of LT Vss P H Hss
and (48), we get the loan to value ratio in steady-state:
ss
" # 1
B
(1 ss ) 1 ss h
LT Vss = 1 z ss ss (484)
1+ ss ss ss 1+ ss
()
" ! # 1
B
1 (1 ss ) 1+ ss
LT Vss = 1 z h
; (485)
1+ ss ss ss ss ss ss
0 B
1
(1 ss )
1+ ss z
1 LT Vss @ h
ss ss
A = 0: (486)
ss ss ss
Which means that we can …nd ss by …xed-point iterations of (486) until convergence. From the …rst-order condition w.r.t.
B
t (43), we get that
! eh;ss =
e ss B HELP 1
ess ; (487)
where, remember that we can …nd the steady-state value of the stochastic discount factor from (39):
" #
prime
HELP 1 ss 1 (1 + ss )
= ; (488)
ss
where we de…ne
53
h h
1 h
prime h B B B h
= ss (1 ss ) ss + (1 ) : (489)
eh;t (40):
Rearrange the FOC w.r.t. B
h h B
i i
1 F e
ss Rss Bh;ss + ss
(1 ss )
1 ! eh;ss
e ss B
1+ ss
h h
B h h
(1 ss ) B h B B h
z
ss ss ss 1 ess + ss (1 ss ) ss 1 ess = 0 (490)
()
1 F e
ss Rss Bh;ss +
HELP 2
! eh;ss +
e ss B HELP 3
ess = 0;
where " " # #
B
HELP 2 (1 ss )
= ss 1 ; (491)
1+ ss
h
HELP 3 z B h
=[ ss ss ss 1] ss 1 ; (492)
and we have used that

h
B h
h
1 B B h
h
ss 1 = z
(1 ss ) ss 1 : (493)
ss ss
eh;ss from (487) into (490) to get:

e ss B
Insert for !
1 F
ss Rss
eh;ss +
B HELP 2 HELP 1
ess + HELP 3
ess = 0
() (494)
1
ess = HELP 2 HELP 1
+ HELP 3
1 F
ss Rss
eh;ss :
B
Insert this into (487) to get:
HELP 1
F
e ss =
! HELP 2 HELP 1 HELP 3 ss Rss 1 : (495)
+
We have now the possibility to solve the steady-state of the housing market. From market clearing in the …nal goods market
(303) we can now …nd IeH;ss :
IeH;ss = A
ess ess
C IeC;ss e ss
G e O;ss :
Q (496)
We now have both IeH;ss and IeC;ss , so Iess can be found from (304). From the housing accumulation equation (145), the
housing adjustment costs (146) and the solution of IeH;ss from (496) we have that
h 1
e ss = 1 ss (1 H)
H z
IeH;ss ; (497)
ss
which means that

z
ss
H;ss = h
1+ H: (498)
ss
As the steady-state value of Pess

H
= 1 by assumption, we use (39), (495), ss
e t (42) to …nd that
and FOC w.r.t. to H
e ss ) = PeH u
e0 (H 0 e H h ss h
w ss e Css 1 1 ss ss ss e ss
! ss ss ; (499)
1+ ss
i.e.
h
zss e ss )H
e0 (H
=w e ss : (500)
From the FOC w.r.t. to housing (147), we then get that
zHS;ss = Pess
H
: (501)
We can then …nd B eh;ss from the constraint on households loans (48) and therefore ess from (494). Likewise we can …nd
e e I;ss and R
Be;ss from the constraint on entrepreneurs loans (121), and the fact that we now know ess , K eK;ss . Given this we
e
can also …nd ess from (427).
54
Then we turn to the banking sector. Total loans are given by (209):
ess = B
B ee;ss + B
eh;ss : (502)
By using the calibrated share of deposits we get:
e ss = odB
D ess : (503)
By using the FOC w.r.t. to deposits (41):
d de0 (D
e ss )
ss Rss = 1 e0 (C
u ess )
()
e0 e
d Dss = u 0 e
e Css 1 d
ss Rss
(504)
()(36)
e ss u
zd = D e0 Cess 1 d
ss Rss :
ss
Average lending rate is then found by (197):
eh;ss
B e
A F e Be;ss
Rss = Rss + Rss : (505)
Bess Bess
Then we can solve the following system of equation by …xed-point iterations, i.e. equations (195), (208), (194), (193), (200),
the de…nition of capital as share of total assets and (196):
ab e T OT
Rss BF;ss
!B
ss = ; (506)
(1 ss
e
B ) RA B
ss ss
eF;ss
Bss = B T OT e ss
+K B
; (507)
" # 1
b
eB (1 )
K ss = 1 z
Jess ; (508)
ss ss
Jess = (Rss
F eh;ss + (Re
1)B t
ee;ss
1)B (Rtd e ss
1)D (Rt ess
1)B ess F ! B
B ss ; (509)
" #
e ss
K B
b
Rss Rss = F !B
ss f !B
ss !B
ss ; (510)
ess
B e ss
K B
e ss
K B
B
= ss + 0:02; (511)
ess
B
d e ess
ab Rss Dss + Rss B
Rss = : (512)
Be T OT
F;ss
From (210) we can …nd private foreign debt held by banks:
ess = B
B eF;ss
T OT e ss :
D (513)
Then, by (198) and (199), we can …nd F !B
ss and f !B
ss respectively. Using that ess
B T OT
= 0 and (202) we get:
eF;ss = B
B e : (514)
ss
We can then …nd the amount that is used of the oil fund in each period by using (277):
e C;ss = ( Rss
G eF;ss + Set Pess
1)B O e
YO;ss : (515)
z
ss ss
Lastly, from the demand for export (281), we can …nd:
f Pess
M M
ss
YeN AT ;ss = : (516)
(1 )
The rest is found by trivial substitution.
- We did it!
- Now what?
55
17 List of all parameters
Table 1: Households
Parameter Description Value

Discount factor. 0.99
bc Habit persistence. Consumption. 0.83561
bh Habit persistence. Housing. 0.50122
bl Habit persistence. Labor. 0
bd Habit persistence. Deposits. 0.85
Disutility of labor supply. 3
H
Housing depreciation. 0.018
h
Captures the dynamic in the amortization rate for households. 0.9959
h
Parameter a¤ecting the amortization rate for households. 1.0487
W
Captures the cost of changes in the wage in‡ation rate. 1.008
sa
b Share of households that have forward looking expectations 0.6
regarding house prices.
sa
Degree of how backward looking agents are while forming house 0.99
price expectations.
Table 2: The intermediate goods sector

Capital share. Intermediate …rms. 0.55
Elasticity of substitution between labor and capital. 0.55076
PQ
Captures the cost of changing prices in the domestic market. 1.9726
Multiplied by 100.
PM
Captures the cost of changing prices of export. Denoted in foreign 1.16
currency. Multiplied by 100.
Table 3: Final goods sector

Domestic goods share at home. 0.70451
Elasticity of substitution between domestic and imported goods. 0.5
56
Table 4: Entrepreneurs

u Captures the cost of changing the utilization rate for entrepreneurs. 4
e
Captures the dynamic in the amortization rate for entrepreneurs. 0
e
Parameter a¤ecting the amortization rate for entrepreneurs. 0.9977
Table 5: Capital producer

I1 Captures the degree of adjustment costs for investments. 1.15
I2 Captures the degree of adjustment costs for investments. 41.4673
Capital depreciation. 0.025
Table 6: Housing producer

H1 Captures the degree of adjustment costs for housing investments. 32.0279
H2 Captures the degree of adjustment costs for housing investments. 64.3204
Table 7: Banking sector

Share of the total lending that will be given as a penalty to banks 0.01
which fail to meet their capital requirements.
F
Captures the cost of changing the interest rate to households. 4.5545
e
Captures the cost of changing the interest rate to entrepreneurs. 28.1312
D
Captures the cost of changing the deposit rate. 4.6162
B1
Captures how the endogenous risk premium is a¤ected by total 0.6
foreign debt position.
B2
Captures how the endogenous risk premium is a¤ected by total 0.003
foreign debt position.
Table 8: Oil sector

q Final goods share. Oil supply …rms. 0.4
l Labor share. Oil supply …rms. 0.45
PR
Captures the cost of adjusting oil supply goods prices in the 2
domestic market. Multiplied by 1000.
PR
Captures the cost of adjusting oil supply goods prices in the foreign 2
market. Multiplied by 1000.
O
Depreciation rate of oil rigs. 0.1
o Rigs share. Oil extractors. 0.4
uf
Captures the cost of changing the utilization rate for oil extraction 12.7333
…rms.
RI
Captures the cost of changing oil investment. 3
o Exported oil supply goods from home share. Foreign oil extractors. 0.15
R
Elasticity of substitution between oil supply goods domestically. 400
R
Elasticity of substitution between oil supply goods abroad. 5
57
Table 9: Foreign sector

PM
Captures the cost of changing prices of imported goods. Multiplied 2
by 100.
Y
Share of backward looking agents, trading partners output. 0.4756
R
Parameter that relates real interest rate to trading partners output. 1
!R Weight on lagged interest rate in the Taylor rule for trading 0.7
partners.
!P Weight on in‡ation in the Taylor rule trading partners. 1.4678
!Y Weight on output in the Taylor rule trading partners. 0.028
P
Parameter that relates expected in‡ation for our trading partners to 0.15
in‡ation for out trading partners today.
Y
Parameter that relates trading partners output to trading partners 0.1415
in‡ation.
P
Share of backward looking agents, trading partners in‡ation. 0.8103
OP
Parameter that relates the real oil price to trading partners 0.002
in‡ation.
MC Autocorrelation in the marginal costs abroad. 0.10971
Foreigners’elasticity of substitution abroad between foreign and 0.5
exported goods.
O
Parameter that relates the real oil price to trading partners output. 0.0447
Y NT P
Parameter that relates non-trading partners output to trading 0.9435
partners output.
Y NT P
Persistents in the non-trading partners output shock. 0.91288
ON T P
Parameter that relates oil price gap to non-trading partners output. 0.0016
Y NT P
Parameter that relates trading partners output to non-trading 0.0088
partners output.
GLOB
Weight on trading partner output gap in global output gap. 0.1
O
Parameter that steers the how the real oil price is a¤ected by 0.9071
expected the real oil price.
O
Parameter that steers how global demand a¤ect the real oil price. 2.2489
Table 10: Shock processes

MC Foreign marginal cost. (IPK). Standard deviation of the innovation. 0.18072
h Autocorrelation in the house price in‡ation shock process. 0.9734
h House price stochastic trend in‡ation. Standard deviation of the 0
innovation.
z Autocorrelation in the stochastic trend growth rate shock process. 0.1438
z Stochastic trend growth rate. Standard deviation of the innovation. 0
G Autocorrelation in the government expenditure shock process. 0.76679
G Government spending. Standard deviation of the innovation. 0.0062776
Autocorrelation in the export shock process. 0.7997
Foreign preferences for home goods. Standard deviation of the 0.008782
innovation.
O Autocorrelation in the oil in the ground shock process. 0.7
O Oil in the ground. Standard deviation of the innovation.
ent Autocorrelation in the parameter that sets the loan to value ratio in 0.94515
steady-state for entrepreneurs shock process.
ent A parameter that sets the loan to value ratio in steady-state for 0.028752
entrepreneurs. Standard deviation of the innovation.
Autocorrelation in the parameter that sets the loan to value ratio in 0.72566
steady-state for households shock process.
A parameter that sets the loan to value ratio in steady-state for 0.29943
households. Standard deviation of the innovation.
58
Autocorrelation in the competition in the labor market shock 0.31263
process.
Competition in the labor market. Standard deviation of the 1.1015
innovation.
B Autocorrelation in the risk on return for the banks’portfolio 0.5
investment shock process.
B Risk on return for the banks’portfolio investment. Standard 0
deviation of the innovation.
D Autocorrelation in the elasticity of substitution between banking 0.96
deposits for households shock process.
D Elasticity of substitution between banking deposits for households.
Standard deviation of the innovation.
e Autocorrelation in the elasticity of substitution between banking 0.86458
loans to entrepreneurs shock process.
e Elasticity of substitution between banking loans to entrepreneurs. 0.13621
F Autocorrelation in the elasticity of substitution between imported 0.5
goods shock process.
F Elasticity of substitution between imported goods. Standard 0
F Autocorrelation in the elasticity of substitution between exported 0
F Elasticity of substitution between exported goods. Standard 0
H Autocorrelation in the elasticity of substitution between home 0.44428
H Elasticity of substitution between home goods. Standard deviation 0.2492
of the innovation.
IH Autocorrelation in the elasticity of substitution between banking 0.83068
loans to households shock process.
IH Elasticity of substitution between banking loans to households. 0.20199
B Autocorrelation in the exchange rate risk premium shock process. 0.84019
B Exchange rate risk premium. Standard deviation of the innovation. 0.0039364
d Autocorrelation in the households’preferences for deposits shock 0.5
process.
d Households’preferences for deposits. Standard deviation of the 0
innovation.
IOIL Autocorrelation in the oil investment shock process. 0.75831
IOIL Oil investment. Standard deviation of the innovation. 0.070715
h Autocorrelation in the households’preferences for housing shock 0.71878
process.
h Households’preferences for housing shock. Standard deviation of 0.18065
the innovation.
HS Autocorrelation in the house price shock process. 0.5
HS House price. Standard deviation of the innovation. 0
I Autocorrelation in the investment shock process. 0.23313
I Investment. Standard deviation of the innovation. 1.5959
IH Autocorrelation in the housing investment shock process. 0.85717
IH Housing investment. Standard deviation of the innovation. 0.044314
rnf olio Autocorrelation in the monetary policy shock process (when solved 0.75
under optimal policy).
inf Monetary policy preference (when solved under optimal policy).
m Autocorrelation in the import shock process. 0.86127
m Import. Standard deviation of the innovation. 0.0074212
YO Autocorrelation in the oil production abroad shock process. 0.60231
YO Oil production abroad. Standard deviation of the innovation. 0.064898
59
OIL Autocorrelation in the oil extraction productivity shock process. 0.7
OIL Oil extraction productivity. Standard deviation of the innovation. 0
prem Autocorrelation in the money market risk premium shock process. 0.82408
prem Money market risk premium. Standard deviation of the innovation. 0.00041468
R Autocorrelation in the oil supply productivity shock process. 0.7
R Oil supply productivity. Standard deviation of the innovation. 0
RN 3M Autocorrelation in the monetary policy shock process (when solved 0.26002
with a Taylor rule).
RN 3M Monetary policy (when solved with a Taylor rule). Standard 0.001243
u Autocorrelatin in the household preferences for consumption shock 0.67911
process.
u Household preferences for consumption. Standard deviation of the 0.02325
innovation.
wedge Autocorrelation in the inventories shock process. 0.85065
wedge Inventories. Standard deviation of the innovation. 0.011497
U Autocorrelation in trading partners’productivity shock process. 0.74802
U Trading partners’productivity. Standard deviation of the 0.019853
innovation.
H Autocorrelation in the trading partners’price markup shock process. 0.11293
H Trading partners’price markup. Standard deviation of the 0.012828
innovation.
R Autocorrelation in trading partners’monetary policy shock process. 0.58898
R Trading partners’monetary policy. Standard deviation of the 0.0012267
innovation.
zL Autocorrelation in the shock to productivity in the intermediate 0.84901
sector.
B Autocorrelation in the shock to bank capital requirement. 0.95
PO Autocorrelation in the oil price (supply) shock. 0.72307
B Bank capital requirement. Standard deviation of the innovation. 0
zL Productivity in intermediate sector. Standard deviation of the 0.006481
innovation.
Y NT P Output non-trading partner (Global demand shock). Standard 0.0017299
Table 11: Steady state variables

ss Steady-state value of in‡ation. Quarter-on-quarter change. 1.0062
ss Steady-state value of foreign in‡ation. Quarter-on-quarter change. 1.0050
z
ss Steady-state value of trend growth. 1.0043
h
ss Steady-state value of the house price trend in‡ation. 1.0011
Rss Steady-state value of 3-month money market interest rate for our 1.0092
trading partners.
D
ss Steady-state value of elasticity of substitution between banking -800
deposits for households.
e
ss Steady-state value of elasticity of substitution between loans to 135
entrepreneurs.
IH
ss Steady-state value of elasticity of substitution between loans to 200
housholds.
60
F
ss Steady-state value of elasticity of substitution between imported 5.2942
goods.
F
ss Steady-state value of elasticity of substitution between exported 5.2004
goods.
H
ss Steady-state value of elasticity of substitution between intermediate 5.4251
goods.
ss Steady-state value of competition in the labor market. 4.9827
g
M C ss Steady-state value of foreign marginal cost. (IPK). 1
og Steady-state value of government share of …nal goods minus …nal 0.3
goods as inputs to the oil supply sector.
oc Steady-state value of consumption share of …nal goods minus …nal 0.55
goods as inputs to the oil supply sector.
oq Steady-state value of of …nal goods used as input in the oil supply 0.037
sector as share of …nal goods.
om Steady-state value of imports as a share of …nal goods. 0.35
spread Steady-state value of spread between the wholesale lending rate and 0.00125
the money market interest rate.
e
LT Vss Steady-state value of loan to value ratio for households. 0.35
LT Vss Steady-state value of loan to value ratio for entrepreneurs. 0.85
fO ;ss
M Steady-state value of import volume of oil. 0.023775
eess Steady-state value of elasticity of substitution abroad between 0.5
foreign and exported goods (from home country).
YeN AT ;ss Steady-state value of foreign production level. 1
Steady-state value of domestic goods share abroad. 0.72222
Oss Steady-state value of value of oil in the ground. 1
Pess
O
Steady-state value of the real oil price. 1.5
d
zss Steady-state value of oil extraction productivity shock process. 0.6667
b
ss Steady-state value of the capital requirement. 0.1
61
References
[1] Benes, J., and M. Kumhof (2011): "Risky Bank Lending and Optimal Capital Adequacy Regulation," IMF Working
paper 11/130.
[2] Bergholt, D. and V. Høghaug (2016): "Business cycles in an oil economy: Lessons from Norway," Working Paper 16,
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[3] Bernanke, B. S., M. Gertler, and S. Gilchrist (1999): "The Financial Accelerator in a Quantitative Business Cycle
Framework," Handbook of Macroeconomics, in: J. B.
[4] Brubakk, Leif and Gelain Paolo, Financial factors and the macroeconomy - a policy model, Norges Bank Sta¤ Memo
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Economy Model," Norges Bank Sta¤ Memo 2006/6.
[6] Brubakk, L., and T. Sveen (2006): "NEMO - a new macro model for forecasting and monetary policy analysis," in
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27-65.
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A complete documentation of Norges

Bank’s policy model NEMO

Erling M. Kravik2 and Kenneth S. Paulsen2

September 20, 2017

3 Intermediate goods sector 11

4 Final goods sector 16

16 The steady-state solution of the model 46

1.1 Syntax and notation

2.1 Maximization problem

Household’s borrowing process:

t+1 (j) = 1 t (j) + 1 , (5)

t+1 (j) = 1 t (j) t (j) 1 + 1 . (10)

w.r.t. Wt (recall (8))

t (j) W Wt (j) =Wt 1 (j) 1=Wt 1 (j)

2.2.2 First-order conditions

w.r.t. Dt (recall (15))

where we have used that

v 0 (Lt ) Zt v 0 (Lt ) Zt v 0 (Lt ) et ):

2.2.3 The constraints

from (10) and lagged we then have that

2.2.4 Equations included in the model

v 0 (Lt ) = Lss ; (37)

2.3.2 First-order conditions

3 Intermediate goods sector

3.1 Maximization problem

w.r.t. K I;t (n):

The marginal cost function can be found by:

FOC w.r.t. LI;t (n; j) :

Inserting the FOC into the labor constraint gives

LI;t (n; j) = LI;t (n)

LI;t (j) = LI;t (n; j)dn = LI;t (n)dn

LI;t (j) = LI;t (n)dn

LI;t (j) = LI;t : (60)

FOC w.r.t. PtQ (n):

Similarly, the FOC w.r.t. PtM (n) can be written as

3.2 Making the equations stationary

3.2.2 Demand equations

Similarly, for (65) we get that

3.2.4 Equations included in the model

3.3 Steady-state equations

4 Final goods sector

The production function is given by

4.1 Cost minimization

Same type of cost minimization problem for Mt (f ) leads to

4.2.1 Equations included in the model

4.3 Steady-state equations

We de…ne utilized capital in period t as

RK;t PtK PtK Pt 1 1

5.2 Making the equations stationary

5.2.1 First-order conditions

w.r.t. Kt stationary gives:

Bee;t ee;t Rte Et [ ]

5.2.3 The constraints

5.2.4 Equations included in the model

5.3 Steady-state equations

6.1 Maximization problem

max [PtK Kt PtK (1 ) Kt 1 Pt IC;t ];

s.t. the capital accumulation equation:

Maximization gives the following FOC w.r.t. IC;t :

0 1 IC;t IC;ss zss 1 IC;t IC;t 1 1

0 IC;t IC;ss zss IC;t IC;t 1

FOC w.r.t. IC;t :