A dynamic aggregate supply and aggregate demand model with Matlab

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.