(Requires Appendix Material)The Long-Run,stationary State Solution of an AD(p,q)model,which Can

question 50

Essay

(Requires Appendix material)The long-run,stationary state solution of an AD(p,q)model,which can be written as A(L)Yt = β0 + c(L)Xt-1 + ut,where = 1,and = -βj,cj = δj,can be found by setting L=1 in the two lag polynomials.Explain.Derive the long-run solution for the estimated ADL(4,4)of the change in the inflation rate on unemployment: t = 1.32 - .36 ΔInft-1 - 0.34vInft-2 + 0.7ΔInft-3 - 0.3ΔInft-4
-2.68Unempt-1 + 3.43Unempt-2 - 1.04Unempt-3 + .07Unempt-4
Assume that the inflation rate is constant in the long-run and calculate the resulting unemployment rate.What does the solution represent? Is it reasonable to assume that this long-run solution is constant over the estimation period 1962-1999? If not,how could you detect the instability?

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