AS-AD REVISITED: OVERSHOOTING ADJUSTMENT DYNAMICS UNDER NAÏVE EXPECTATIONS

Harald Badinger*, Ingrid Kubin

*Corresponding author for this work

Publication: Scientific journalJournal articlepeer-review

Abstract

We analyse the adjustment dynamics from a short-term to a medium-term equilibrium in a standard AS-AD model à la Blanchard (2006, Macroeconomics, 4th edn, Prentice-Hall, Upper Saddle River, NJ) for an open economy with fixed and flexible exchange rates. An explicit analysis suggests the local stability of the medium-term equilibrium. However, an overshooting adjustment dynamics is possible for the exchange rate, a result that directly relates to the famous Dornbusch (1976, Journal of Political Economy, 84, pp. 1161–1176) analysis. In contrast to the latter, in the Blanchard framework it is obtained without assuming rational expectations and without relying upon saddle-path stability.

Original languageEnglish
Pages (from-to)574-593
Number of pages20
JournalMetroeconomica
Volume59
Issue number4
DOIs
Publication statusPublished - Nov 2008

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