2024/15 | LEM Working Paper Series | ||||||||||||||||
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Accounting for the Multiple Sources of Inflation: an Agent-Based Model Investigation |
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Leonardo Ciambezi, Mattia Guerini, Mauro Napoletano and Andrea Roventini |
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Keywords | |||||||||||||||||
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Inflation, agent-based models, market structure, mark-up rates, sellers' inflation
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JEL Classifications | |||||||||||||||||
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E31, E32, C63
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Abstract | |||||||||||||||||
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In this work, we develop a macroeconomic agent-based model to study
the role of demand and supply factors in the determination of
inflation dynamics. The model is characterized by local interactions
of heterogeneous firms and households in the labor and goods
markets. Imperfect information implies that market selection is
imperfect, as it does not depend only on relative prices but also on
firm size. We show that our model is able to generate realistic
inflation dynamics, as well as a non-linear Phillips curve in line
with the empirical evidence. We then find that the traditional
demand-led explanation of inflation stemming from a tight labor market
only holds when markets are competitive and efficient. Finally, we
study the response of inflation to shocks impacting on consumption,
labor productivity or energy costs. The results show that only demand
shocks lead to wage-led inflation surges. Productivity shocks are
entirely passed-through to prices without affecting the income
distribution. Energy shocks, instead, induce sellers' inflation after
changes in both firms' cost structure and profit margins. This is in
line with the recent empirical evidence for the Euro Area.
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