Gunnar Bårdsen and Ragnar Nymoen 881of the real exchange rate. Hence, a 1% real appreciation in terms of consumer prices
is associated with only a 0.55% appreciation in terms of import prices.
The equations for wage formation and domestic price-setting, in steady-state
form, are given by (17.49)–(17.50) and have already been discussed in section
17.2.6. Equation (17.51) models output per hour of labor input, or productivityz.
Productivity is positively influenced by both the real wage
(
w−p)
and the unem-
ployment rateu– corresponding to efficiency wage models – as well as neutral
technological progress approximated by a linear trend.
The steady-state rate of unemployment in equation (17.52) is seen to depend on
the growth of real wages (which is contant in the steady state), and the difference
between the real interest rate and the real GDP growth rate (see also Hendry, 2001b),
which can potentially change, and will then induce a change in the long-run mean
of the rate of unemployment.
Equations (17.53)–(17.56) represent the steady-state relationships for the market
interest rates for loansRLand bondsRB, (17.53) and (17.54), followed by the
equations for GDP (17.55) and domestic credit (17.56). Government expenditure is
seen to be important in the GDP equation, but aggegate demand is also influenced
by the market for foreign exchange through the real exchange rate(v+p∗−p)
(dubbedrexabove) and the domestic real interest rate. According to equations
(17.55) and (17.56), secular growth in domestic real credit is conditioned by the
growth of the real economy, not the other way around, but an exogenous drop in
credit supply (i.e., reducedμl−p) will harm GDP growth in the short run.
From the set of long-run relationships, it is straightforward to derive the steady
state of the model. Differentiation of (17.47) gives inflation as:
p=p∗+v, (17.57)and steady-state wage growth is then:
w=p∗+z+v, (17.58)while import inflation follows from the price equation (17.49) and becomes:
pi=p∗+v. (17.59)Note that these relationships represent the same qualitative conclusion that we
obtained from analysis of the theoretical supply-side model; compare equation
(17.32), e.g., which is therefore seen to generalize to the full set of economic steady
state relationships.
In light of the above, it also becomes clear that the economic long-run rela-
tionship (17.48) represents no separate restriction on the long-run relationship
between growth rates, as it is a relationship between the marginal means of the
two real exchange rates. The rest of the model can be solved for the steady-state
rate of productivity, and for the steady-state unemployment level using (17.58),
(17.51) and (17.52). Finally, the GDP growth rate and rate of growth in credit then
follow from (17.47) and (17.56).