Post-COVID inflation and the monetary policy dilemma: an agent-based scenario analysis

Max Sina Knicker (), Karl Naumann-Woleske, Jean-Philippe Bouchaud and Francesco Zamponi ()
Additional contact information
Max Sina Knicker: Ecole Polytechnique
Karl Naumann-Woleske: Ecole Polytechnique
Jean-Philippe Bouchaud: Ecole Polytechnique
Francesco Zamponi: Sapienza Università di Roma

Journal of Economic Interaction and Coordination, 2025, vol. 20, issue 1, No 5, 195 pages

Abstract: Abstract The economic shocks that followed the COVID-19 pandemic have brought to light the difficulty, both for academics and policy makers, of describing and predicting the dynamics of inflation. This paper offers an alternative modelling approach. We study the 2020–2023 period within the well-studied Mark-0 Agent-Based Model, in which economic agents act and react according to plausible behavioural rules. We include a mechanism through which trust of economic agents in the Central Bank can de-anchor. We investigate the influence of regulatory policies on inflationary dynamics resulting from three exogenous shocks, calibrated on those that followed the COVID-19 pandemic: a production/consumption shock due to COVID-related lockdowns, a supply chain shock, and an energy price shock exacerbated by the Russian invasion of Ukraine. By exploring the impact of these shocks under different assumptions about monetary policy efficacy and transmission channels, we review various explanations for the resurgence of inflation in the USA, including demand-pull, cost-push, and profit-driven factors. Our main results are fourfold: (i) without appropriate fiscal policy, the shocked economy can take years to recover, or even tip over into a deep recession; (ii) the success of monetary policy in curbing inflation is primarily due to expectation anchoring, rather than to the direct economic impact of interest rate hikes; (iii) however, perhaps paradoxically, strong inflation anchoring is detrimental to consumption and unemployment, leading to a narrow window of “optimal” policy responses due to the trade-off between inflation and unemployment; (iv) the two most sensitive model parameters are those describing wage and price indexation. The results of our study have implications for Central Bank decision-making, and offer an easy-to-use tool that may help anticipate the consequences of different monetary and fiscal policies.

Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11403-024-00413-3 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:jeicoo:v:20:y:2025:i:1:d:10.1007_s11403-024-00413-3

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/11403/PS2

DOI: 10.1007/s11403-024-00413-3

Access Statistics for this article

Journal of Economic Interaction and Coordination is currently edited by A. Namatame, Thomas Lux and Shu-Heng Chen

More articles in Journal of Economic Interaction and Coordination from Springer, Society for Economic Science with Heterogeneous Interacting Agents Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().