Alpha is a positive parameter that reflects the sensitivity of aggregate demand to changes in the interest rate. A given change in the real interest rate has a bigger effect on output if alpha is large than if it is small.
Rho can be thought of as the “natural rate of interest,” the interest rate that, in absence of demand shocks, would prevail when output equals its natural level. To keep the model from becoming too complicated, we take rho to be an exogenous constant term.