ABSTRACT
The SP-DG model, Short-run expectations augmented Phillips-Demand Growth, is a macroeconomic framework used to analyse the dynamics of inflation and output gap in three different cases: disinflation strategies, permanent demand shocks and temporary supply shocks. It illustrates both an aggressive strategy and a more gradual one for disinflation strategies, In the case of a permanent demand shock, the dynamics of the state variables, assuming different processes of expectation formation by economic agents, are studied. In the case of the temporary supply shocks, three different policymaker responses, such as neutral, accommodating and extinguishing, are considered. The set-up of the model starts by specifying relationships among variables through the three central equations: the expectation formation process of the inflation rate, the SP and the DG curves. The SP curve characterises the short-run aggregate supply and considers that the inflation rate depends positively on the expected inflation rate, on the output gap, and on a supply shock.
