AS-AD Curves: An Analysis Using the BQ and OLS Methods

The demand and supply shocks in the U.S. and China are analyzed using the Blanchard and Quah (BQ) and ordinary least squares (OLS) methods. For the U.S. data, the aggregate supply (AS) curve has a positive slope, whereas the aggregate demand (AD) curve has a negative slope. However, the two methods yield inverse results when data from China are analyzed. In the BQ method, the AS curve slope is negative and AD curve slope is positive, indicating a “slope puzzle.” In the OLS method, no “slope puzzle” is present.