Question: Suppose yt follows a second order FDL model: yt = a0 + (0zt + (1zt-1 + (2zt-2 + ut. Let z* denote the equilibrium value

Suppose yt follows a second order FDL model:
yt = a0 + (0zt + (1zt-1 + (2zt-2 + ut.
Let z* denote the equilibrium value of zt and let y* be the equilibrium value of yt, such that
y* = a0 + (0z* + (1z* + (2z*.
Show that the change in y*, due to a change in z*, equals the long-run propensity times the change in z*:
(y* = LRP((z*.
This gives an alternative way of interpreting the LRP.

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