Supply-Demand Analysis of Inflationary Economic Growth

Abstract

The aggregate supply and demand framework is an ineffective method of analysis for examining the relation between inflation and real economic growth, since this conventional model focuses instead directly upon real output and the aggregate price level. Inflationary economic growth, however, may be directly analyzed by constructing a framework based on the aggregate supply and demand elasticities in combination with the dynamics of the aggregate production function. This modified model is derived and econometrically estimated for the time period 1961-2005. The framework is then used to simulate the effects of stabilization policy and the self-correcting mechanism upon inflationary economic growth during an expansionary gap and a contractionary gap.

JEL Classification: E3, E5