Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/315162 
Year of Publication: 
2025
Series/Report no.: 
Working Paper No. 10.2025
Publisher: 
Fondazione Eni Enrico Mattei (FEEM), Milano
Abstract: 
We develop a macroeconomic agent-based model to study the role of demand and supply factors in determining inflation dynamics. Local interactions of heterogeneous firms and households in the labor and goods markets characterize the model. Asymmetric information implies that firm selection is imperfect and depends both on firms' relative prices and on their size. We calibrate the model on EU data by using the method of simulated moments and show that it can generate realistic inflation dynamics and a non-linear Phillips curve in line with recent empirical evidence. We then find that the traditional demand-led explanation of inflation stemming from a tight labor market only holds when selection in the goods markets is mostly driven by relative prices in comparison to firm size. Finally, we study the response of inflation to shocks impacting consumption, labor productivity, or energy costs. The results indicate 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.
Subjects: 
Inflation
agent-based models
market structure
mark-up rates
sellers' inflation
JEL: 
E31
E32
C63
Document Type: 
Working Paper

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