function [BETA,THETA,D,ETA,B,A,gl,gh,phig,zl,zh,phiz,ALFA,TM]=param(MU1)
%[BETA,THETA,D,ETA,B,A,gl,gh,phig,zl,zh,phiz,ALFA,TM]=param(MU1) computes the parameters of the model
%Input: MU (the markup)
%(c) Stephanie Schmitt-Grohe and Martin Uribe

ALFA = 1; %fracton of s(v) not rebated

BETA = 1/1.04;

H=.2; %steady state effort

SG=.2; %steady state consumption

SB = 0.44;

%Transaction cost technology s(v)
A=0.0111;
B=0.07524; %this assumes s(v) =A v + B/v -2sqrt(AB); see RATS program data/money.prg

PAI = 1.042; %Avg US GDP deflator since 1960

%Stochastic processes
gl = SG*H*(350/(350+402)*2);
gh = SG*H*(402/(350+402)*2);
phig=.95; %prob(gh|gh)=prob(gl|gl)
%These moments are not needed but for info
mean_g = (gh+gl)/2;
std_g = gh-mean_g;
acov_g = (2*phig-1)*std_g^2;
acorr_g = 2*phig-1;

zl=1-.04;
zh=1+.04;
phiz=.91; %prob(zh|zh)=prob(zl|zl)
%These moments are not needed but for info
mean_z = (zh+zl)/2;
std_z = zh-mean_z;
acov_z = (2*phiz-1)*std_z^2;
acorr_z = 2*phiz-1;

%IMPLIED PARAMETERS
MU = 1.2;
ETA=MU/(1-MU); %MARKUP=MU=ETA/(1+ETA);

SC = (1-SG); %consumption share in GDP

%CALIBRATION OF THETA
%We assume that 
%U(c,h)=log c + THETA log (1-h) 

R = PAI/BETA; %Gross nominal interest rate

V = sqrt(B/A+(R-1)/R/A);
S=A*V+B/V-2*sqrt(A*B);
SP=A-B/V^2;
GAMA=1+S+V*SP;

TAU = -MU*(SB*(1-R/PAI) - SC/V/(1+ALFA*S)*(1/PAI-1) - SG);

THETA = (1-TAU)/ MU / SC * (1-H)/H *(1+ALFA*S)/GAMA; 

%SB = (1-R/PAI)^(-1) * (SC/V/PAI/(1+S)+SG-TAU/MU-SC/V/(1+S))

SD = (R*SB+SC/(1+ALFA*S)/V)/PAI;

D = H * SD; % Total gov't liabilities

ETA=MU1/(1-MU1); 

%Construct Transition Matrix for Markov processes of g & z
% STATES
%(gh,zh)=1
%(gh,zl)=2;
%(gl,zh)=3;
%(gl,zl)=4;
TM = [phig*phiz phig*(1-phiz) (1-phig)*phiz (1-phig)*(1-phiz); phig*(1-phiz) phig*phiz (1-phig)*(1-phiz) (1-phig)*phiz; (1-phig)*phiz (1-phig)*(1-phiz) phig*phiz phig*(1-phiz); (1-phig)*(1-phiz) (1-phig)*phiz phig*(1-phiz) phig*phiz];