The Economy as an Evolving Complex System IV, pp. xx–xx
DOI: 10.37911/9781947864665.02
13. How an Agent-Based Model Can Support Monetary Policy in a Complex Evolving Economy
Author: Cars Hommes, Bank of Canada, University of Amsterdam, and Tinbergen Institute; Sharon Kozicki, Bank of Canada; Sebastian Poledna, International Institute for Applied Systems Analysis; and Yang Zhang, Bank of Canada
Abstract
This chapter sets out a central banker’s perspective on the dynamics of inflation in Canada since the onset of the COVID-19 pandemic using a behavioral agent-based model developed at the Bank of Canada. The model features two crucial assumptions based on empirical evidence: first, firms use simple rules to make price-quantity decisions, and second, inflation expectations are adapted through experience. While the course of the economy in recent years has posed some new challenges about many traditional macroeconomic models, an agent-based model can explain inflation by using simple heuristics and closely tracking survey evidence. We also include an example from policymakers on how an agent-based model can be used to develop insights to support monetary policy in Canada. Finally, we suggest some future avenues for research.
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