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Optimal Inflation Target: Insights from an Agent-Based Model

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Listed:
  • Jean-Philippe Bouchaud
  • Stanislao Gualdi
  • Marco Tarzia
  • Francesco Zamponi

Abstract

Which level of inflation should Central Banks be targeting? We investigate this issue in the context of a simplified Agent Based Model of the economy. Depending on the value of the parameters that describe the behaviour of agents (in particular inflation anticipations), we find a rich variety of behaviour at the macro-level. Without any active monetary policy, our ABM economy can be in a high inflation/high output state, or in a low inflation/low output state. Hyper-inflation, deflation and "business cycles" between coexisting states are also found. We then introduce a Central Bank with a Taylor rule-based inflation target, and study the resulting aggregate variables. Our main result is that too-low inflation targets are in general detrimental to a CB-monitored economy. One symptom is a persistent under-realisation of inflation, perhaps similar to the current macroeconomic situation. Higher inflation targets are found to improve both unemployment and negative interest rate episodes. Our results are compared with the predictions of the standard DSGE model.

Suggested Citation

  • Jean-Philippe Bouchaud & Stanislao Gualdi & Marco Tarzia & Francesco Zamponi, 2017. "Optimal Inflation Target: Insights from an Agent-Based Model," Papers 1709.05117, arXiv.org, revised Feb 2018.
    • Handle: RePEc:arx:papers:1709.05117
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    Cited by:

    1. Indrė Lapinskaitė & Algita Miečinskienė, 2019. "Assessment of the Impact of Hard Commodity Prices Changes on Inflation in European Union Countries," Central European Business Review, Prague University of Economics and Business, vol. 2019(5), pages 18-35.
    2. Dhruv Sharma & Jean-Philippe Bouchaud & Stanislao Gualdi & Marco Tarzia & Francesco Zamponi, 2020. "V-, U-, L-, or W-shaped economic recovery after COVID: Insights from an Agent Based Model," Papers 2006.08469, arXiv.org, revised Feb 2021.
    3. Max Sina Knicker & Karl Naumann-Woleske & Jean-Philippe Bouchaud & Francesco Zamponi, 2023. "Post-COVID Inflation & the Monetary Policy Dilemma: An Agent-Based Scenario Analysis," Papers 2306.01284, arXiv.org, revised Jan 2024.
    4. Severin Reissl, 2022. "Fiscal multipliers, expectations and learning in a macroeconomic agent‐based model," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1704-1729, October.

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