. thus : ( nx = −ηe − α d − d ∗ ) where η is the elasticity of net exports with respect to the exchange rate, and α is the elasticity of net exports to the differential between home and foreign absorption. the real exchange rate is expressed in percent deviation from the steady state. the exchange rate is determined according to an interest rate parity condition which implies that the exchange rate appreciates when domestic interest rates are higher - 14 than foreign interest rates, with elasticities ( φc and φu ) that can differ depending on whether interest rate movements are driven by conventional or unconventional policy : ( ) ( ) e = φc rc − rc ∗ + φu ru − ru ∗. the model is closed by specifying the behavior of the monetary authority. we assume that the monetary authority can adjust either the interest rate associated with conventional policy ( rc ), or the interest rate linked to balance sheet actions ( ru ), or both, to affect output ( its goal variable ). the conventional feedback rule is thus : rc = γ c y, rc ∗ = γ c∗ y ∗, whereas the unconventional feedback rule is : ru = γ u y ru ∗ = γ u∗ y ∗. the system above contains 10 equations in 10 endogenous variables ( y, y *, d, d *, nx, e, rc, rc *, ru, ru * ), as well two shocks, u and u *, that can move gdp, its components, exchange rates, and interest rates. b. simulation results figures 1 and 2 show the results of simulating the model under alternative assumptions about the shocks and monetary policy reaction. in each case, the economy starts in steady state with all variables at zero and experiences a demand shock in period 1 that dies out with an autocorrelation ρ of 0. 95. all parameter values are reported in table 1. - 15 figure 1. home demand shock figure 1 illustrates the case of a favorable demand shock in the home country. the solid lines illustrate the case when home uses the short - term interest rate as its active policy tool, and keeps its balance sheet on hold, consistent with a desire to delay balance sheet normalization. the policy reaction is calibrated to be sufficiently aggressive that home gdp always remains at baseline ( see column 2 of table 1 ). the higher policy rate path ( that is, higher rc ) causes the long - term interest rate ( panel a ) to

##ssation and loss of representativeness of the libor on the same day. rate benchmarks. we still have many difficult issues to solve in this final stage, although the time we have left is very limited. speaking of " the final act of the play " that i just mentioned, in ancient greek theater, a plot device called deus ex machina was sometimes employed, where the absolute god revealed itself and solved all the difficult issues in the hardships. the term was coined after the latin word machina ( " machine " ) as the actors playing the god were brought onto stage using a crane - like machine. in the final stage of the yen libor transition, however, there will be no deus ex machina by any means. most of the necessary tools to achieve a smooth libor transition have been already provided, thanks to the deliberation and efforts made by relevant groups and bodies at home and abroad to facilitate each transition activity. within the remaining time, the success of the libor transition essentially depends on whether each individual market participant will make a good use of those tools and take necessary actions in a steady and swift manner. we are no longer in a phase to consider the feasibility of the libor transition ; we are already in the phase to be fully determined to make steady progress in the transition activities for the completion of the libor transition. today i would like to briefly look back on the events leading up to the current situation. then i would like to focus on the yen libor transition and present points that each individual market participant should take note of in implementing their own transition activities. i. libor transition a. background first of all, let me start by briefly reflecting on the course of events concerning the libor transition and corresponding initiatives in japan. we can divide the past events related to the libor transition into three different stages in retrospect. the first stage started in 2012, when it came to light that there had been a market manipulation and false reporting of libor. as a result, the interest rate benchmark reform soon gained momentum internationally, but the focus of the reform at that time was still on how to improve the robustness of libor as an interest rate benchmark, on the premise that libor publication would be continued. subsequently, in july 2017, the second stage began with a speech given by then chief executive andrew bailey of the u. k. financial conduct authority ( fca ). in his speech, he strongly suggested