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A dynamic aggregate supply and aggregate demand model with Matlab

Author

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  • José M. Gaspar

    (Rua Dr. Roberto Frias, 4200-464 Porto PORTUGAL)

Abstract

We use the framework implicit in the model of inflation by Shone (1997) to address the analytical properties of a simple dynamic aggregate supply and aggregate demand (AS-AD) model and solve it numerically. The model undergoes a bifurcation as its steady state smoothly interchanges stability depending on the relation between the sensitivity of the demand for liquidity to variations in the interest rate and the way expectations on inflation are formed based on real output fluctuations. Using code embedded into a unique function in Matlab, we plot the numerical solutions of the model and simulate different dynamic adjustments using different parameter values. The same function also accommodates for the implementation of different policy shocks: monetary policy shocks through changes in the growth rate of money supply, fiscal policy shocks due to variations in public spending and in the exogenous tax rate, and supply side shocks as given by changes in the level of natural output.

Suggested Citation

  • José M. Gaspar, 2015. "A dynamic aggregate supply and aggregate demand model with Matlab," FEP Working Papers 559, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:559
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    References listed on IDEAS

    as
    1. Torre, V, 1977. "Existence of Limit Cycles and Control in Complete Keynesian System by Theory of Bifurcations," Econometrica, Econometric Society, vol. 45(6), pages 1457-1466, September.
    2. W. W. Chang & D. J. Smyth, 1971. "The Existence and Persistence of Cycles in a Non-linear Model: Kaldor's 1940 Model Re-examined," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(1), pages 37-44.
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    More about this item

    Keywords

    business cycles; local dynamics; computational economics; policy shocks;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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