A graphical representation of an estimated DSGE model

ABSTRACT

We write a New Keynesian model as an aggregate demand curve and an aggregate supply curve, relating inflation to output growth. The graphical representation shows how structural shocks move aggregate demand and supply simultaneously. We estimate the curves on US data from 1948 to 2010 and study two recessions: the 2001 recession and the Great Recession of 2008–2009. The Great Recession is explained by a collapse of aggregate demand driven by adverse preference and permanent technology shocks, and expectations of low inflation.

KEYWORDS:

• DSGE estimation
• graphical analysis
• New Keynesian model
• shock decomposition

JEL CLASSIFICATION:

• E27
• E32
• E58

Notes

¹ Carlin and Soskice (2005) and King (2000) analyse different aspects of the New Keynesian model.

² Mankiw (2009) develops a graphical analysis of an ad-hoc model of aggregate demand and supply.

³ MATLAB files for this article are provided with the Supplementary material.

⁴ Detailed notes and MATLAB code accompanies Ireland’s paper at http://www2.bc.edu/irelandp/programs.html.