Dynamic AD-AS Model

Evidence and data

Use inflation, expected inflation, output gaps, monetary-policy rules, real rates, and supply-shock indicators to separate DAD and DAS movement.

Calibration or measurement

Policy-rule strength, demand sensitivity, supply slope, and expectation updating determine the adjustment path.

Boundaries

• Expectations updating is simplified.
• Potential output is treated as fixed over the short route horizon.
• Financial stress and credit spreads require extra blocks.

Use guidance

When sufficient

Dynamic comparative statics on how demand shocks, supply shocks, and policy-rate changes propagate through output and inflation over several periods when expectations adjust gradually. The DAD-DAS framework provides cleaner time-path intuition than the static AD-AS diagram because it models the central bank's reaction function explicitly and traces inflation back toward target after a shock (Mankiw intermediate-level textbook treatment).

When sketch only

Do not use to answer what produces inflation inertia. The model takes inertia as given through its partially backward-looking supply curve; it does not identify whether the inertia comes from sticky prices, sticky information, wage indexation, or supply-chain dynamics. The question of source requires a model with that friction made explicit.

When to switch

Switch to a three-equation New Keynesian DSGE (dsge:nk) when the question requires fully forward-looking expectations, a microeconomic foundation for the supply slope, or an estimated impulse-response comparison with data. Switch to an estimated VAR or SVAR (empirical:svar) when the actual shape of the output and inflation response to an identified shock is what matters.

Falsification signal

An inflation response to a central-bank rate cut that is faster and larger than the model's gradual adjustment path would predict, sustained across a regime rather than as a single episode, indicates the expectations component is more forward-looking and more decisive than the DAD-DAS lag structure allows.