STABILIZATION AND GOVERNMENT DEFICITS
331
Now, consider the steady-state solution of the difference equation.
A
steady-state solution is a value for the debt/GDP ratio that satisfies the
government budget equation and that is independent of time.
3
A
STEADY
STATE
,
b
t
=
b
t
-
1
=
_
b
, is a solution that gives that value of
b
which if attained will not
change without a shock to the system. The
b
t
=
b
t
-
1
=
_
b
line is the 45-degree
line from the origin and the steady-state value is given by
__
b
=
1
+
r
_____
1
+
g
__
b
+
d
or,
__
b
(
g
-
r
_____
1
+
g
)
=
d
or,
__
b
=
1
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