Demand-Side Stabilization: Overheating, Hard Landing, and Everything in Between

Abstract

In the previous chapter, we examined the possibility of a shift in the goods market equilibrium from E₀ to a higher equilibrium E₁, which equated to an equivalent rightward shift in the AD curve. This chapter continues the analysis with a discussion of the specific fiscal and monetary policies by which the aggregate demand (AD) curve can be shifted to enact demand-side stabilization. This will be followed by an in-depth description of overheating, soft-landings, and hard-landings.

In later chapters, we will examine why a significant body of expectations-based research finds demand-side stabilization to be an ineffective policy prescription in some economies since the 1980s.