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325_Lecture11_Feb28

325_Lecture11_Feb28 - STEADY-STATE(LONG-RUN OF...

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1 S TEADY- S TATE (L ONG- R UN ) OF I NFINITE- P ERIOD E CONOMY: W HY ARE I NTEREST R ATES P OSITIVE? F EBRUARY 28, 2011 February 28, 2011 2 A L ONG- R UN T HEORY OF M ACRO Modern Macro Aggregate economic activity tends to “settle down eventually” The “ups and downs” are business cycles The “average” is the long-run Technical terminology: steady-state Business-cycle analysis after midterm exam time Actual GDP (or virtually any real economic series…) Long-run GDP aka steady-state GDP aka potential GDP
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2 February 28, 2011 3 S TEADY S TATE Macro Fundamentals Steady state A concept from differential equations (Optimality conditions of economic models are differential equations…) Heuristic definition: in a dynamic (mathematical) system, a steady- state is a condition in which the variables that are moving over time settle down to constant values In dynamic macro models, a steady-state is a condition in which all real variables settle down to constant values But nominal variables (i.e., price level) may still be moving over time
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