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I am reading a book on business cycle models, and it keep using the word "steady state". It never defined what that actually means.

Obviously it is the idea that some key variables reach constant levels ... but WHAT key variables? It doesn't explain that.

For example, at one point it says "zero inflation steady state". Uhm, sorry, but what? Zero inflation steady state? Of course inflation is zero in steady state ... otherwise price levels would not be constant, hence not in steady state. In fact, if inflation was ever non-zero, we can NOT be in steady state since then price levels must be changing by definition.

So what am I supposed to make of this? What is steady state??

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  • $\begingroup$ Hi: I think the definition depends on the context. For example, take the kalman filter which is comprised of a set of updating equations.. But, after a while some of the variables ( the variance of the state in a KF ) should reach some constant value even if you update them over and over. This would be considered a steady state. But, in the case of business cycles and other contexts, the meaning is different. In business cycles, I'm not sure what steady state means. I think it has to do with some kind of equilibrium level of something which is slightly different from the meaning in the KF. $\endgroup$ – mark leeds Nov 28 '18 at 6:32
  • $\begingroup$ Inflation does not always need to be zero at a steady state solution. Consider the Sidrauski model of money demand which has a positive inflation in steady state. $\endgroup$ – erik Nov 29 '18 at 0:34
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A system is said to be in steady state if certain variables do not change over time (and where "certain variables" depend on the context and ought to have been clearly specified by the writer).

Say we define a system to be in steady state if inflation does not change over time. Then if inflation is constant at 2%, we say that the system is in steady state even though prices are changing. (This is contrary to what you've suggested in your post.)

(The term steady state was, like the term equilibrium, appropriated from the sciences for use in economics. However, although the term equilibrium is often ill-defined, the term steady state is usually amenable to precise definition, provided the writer makes an effort.)

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Usually the term steady state is derived from the Solow Model and its derivatives that seek to explain long-term economic growth. The steady state is a state in which the growth rate of the economy is constant (but positive!). In the Solow model, the growth rate is more or less a function of the saving rate. An economy might deviate from this because it's either on the path to this steady state or because of temporal fluctuations, where Business Cycle Models kick in. The steady state has hence to be thought of as the initial / or long-term average stat of the economy if around which the business cycle evolves.

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  • $\begingroup$ The "usually" statement can only be true for undergraduates. For graduate macroeconomics or research, steady states are most frequently used outside the context of the Solow Model. $\endgroup$ – BB King Nov 28 '18 at 12:30
  • $\begingroup$ evetyone's answers are good but, in the context of KF, the distinction is that the steady state refers to one of the parameter-estimates in the model converging to an actual level ( a constant level ) and not a rate. But, other than that, I think the term "steady state" in both contexts ( KF an business cycles ) can be thought of as equivalent. $\endgroup$ – mark leeds Nov 29 '18 at 5:16

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