${f}_{t}-{s}_{t}={i}_{t}-{i}_{t}^{*}={\overline{i}}_{t}$ Covered Interest Parity. (I) ${s}_{t}=\left(\lambda -1\right){\overline{i}}_{t}+{\overline{P}}_{t}-ZX\Delta {s}_{t}+{z}_{t}$ Flexible spot rate. (II) ${f}_{t}=\lambda {\overline{i}}_{t}+{\overline{P}}_{t}-ZX\Delta {s}_{t}+{z}_{t}$ Flexible forward rate. (III) ${e}_{t}=D{u}_{t}-FX\Delta {s}_{t}+{v}_{t}$ Changes in the monetary base. (IV) ${\overline{i}}_{t}=E\left(\Delta {\overline{P}}_{t+1}|{I}_{t}\right)+{\overline{r}}_{t}+\Lambda {e}_{t}-HX\Delta {s}_{t}$ Interest rate differential. (V) $E\left({\overline{P}}_{t+1}|{I}_{t}\right)=C\left(D{u}_{t}-FX\Delta {s}_{t}+{v}_{t}\right)$ Expected inflation. (VI) $\Delta {\overline{P}}_{t+1}=C\left(D{u}_{t}-FX\Delta {s}_{t}+{v}_{t}\right)+{x}_{t+1}$ Actual inflation. (VII) Definitions: ${\overline{P}}_{t}$ Price level differential in logs. ${\overline{r}}_{t}$ Real interest rate differential. ${\overline{i}}_{t}$ Nominal interest rate differential. ut Actual minus natural rate of unemployment. Shocks and restrictions: ${v}_{t}=V{v}_{t-1}+{\nu }_{t}$ , ${u}_{t}=U{u}_{t-1}+{w}_{t}$ , ${\overline{r}}_{t}=R{\overline{r}}_{t-1}+{y}_{t}$ , ${z}_{t}={z}_{t-1}+{\epsilon }_{t}$ . C, D, Λ, α and h are all ≥0 while V, U and R are all ≥0 but less than 1.0. Random variables wt, xt, yt, νt and εt have zero means, zero initial values, are uncorrelated and orthogonal. $1\ge F\ge 0$ , $Z=\alpha \left(1+F\right)X$ and $H=h\left(1-F\right)$ .