Complements to the Dynamic AS/AD Model of the Textbook of Jones (2008)

Abstract

In this paper we enlarge the AS/AD model of the recent Jones (2008) textbook of Macroeconomics by adding two elements that enrich the dynamics and theoretical consistency of the model. On the one hand, we include endogenous dynamics in the AD function through the real exchange rate and, on the other hand, we replace the simple adaptive expectations scheme by a more flexible and general mechanism, in which the rate of inflation targeted by the central bank plays an important role. Our framework allows determine endogenously the level and dynamics of the real exchange rate, and contributes to better understanding the macroeconomic adjustments triggered by external shocks and policy actions.