Post-COVID Inflation & the Monetary Policy Dilemma: An Agent-Based Scenario Analysis

Max Sina Knicker, Karl Naumann-Woleske, Jean-Philippe Bouchaud and Francesco Zamponi

Papers from arXiv.org

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 United States, including demand-pull, cost-push, and profit-driven factors. Our main results are four-fold: (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, 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 offers an easy-to-use tool that may help anticipate the consequences of different monetary and fiscal policies.

Date: 2023-06, Revised 2024-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cis, nep-hme, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Journal of Economic Interaction and Coordination 20, 141 (2025)

Downloads: (external link)
http://arxiv.org/pdf/2306.01284 Latest version (application/pdf)

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:arx:papers:2306.01284

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().