O Senay, A Sutherland Joumal of International Economics 117(2019)196-208 (a) Welfare(% of steady state consumption (b)Standard deviation of PPl inflation (% 0.03 0.02 0.01 c)Standard deviations of D and the real exchange rate gap(%) 15 2.5 =0.5 (d)shadow oldings(relative Both shocks 30 20 TFP shocks 0.5 (e)Impact effect of shocks on the rate of return diffential (%) TFP shocks -2.5 5 The policy parameter, 8, is plotted on the horizontal axis in each panel Fig. 1. Portfolio Allocation and the Monetary Policy Rule. that the particular combination of shocks chosen in our benchmark shocks, news shocks, government spending shocks and price nodel is a critical factor in the results illustrated in Table 2 and Fig. 1. mark-up shocks We add more assets and consider a more general policy 6. A more general model pricing. Note that as in the basic model, the number of assets in the extended model is insufficient to provide hedging against In this section we generalise the basic model in a number of di- the full range of shocks, so financial markets continue to be rections. We add four additional sources of risk: labour supply incomplete.that the particular combination of shocks chosen in our benchmark model is a critical factor in the results illustrated in Table 2 and Fig. 1. 6. A more general model In this section we generalise the basic model in a number of di￾rections. We add four additional sources of risk: labour supply shocks, news shocks, government spending shocks and price mark-up shocks. We add more assets and consider a more general policy rule. We also consider the effects of local currency pricing. Note that as in the basic model, the number of assets in the extended model is insufficient to provide hedging against the full range of shocks, so financial markets continue to be incomplete. Fig. 1. Portfolio Allocation and the Monetary Policy Rule. O. Senay, A. Sutherland / Journal of International Economics 117 (2019) 196–208 203