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The economic shocks that followed the COVID-19 pandemic have brought to lightthe difficulty, both for academics and policy makers, of describing andpredicting the dynamics of inflation. This paper offers an alternativemodelling approach. We study the 2020-2023 period within the well-studiedMark-0 Agent-Based Model, in which economic agents act and react according toplausible behavioural rules. We include a mechanism through which trust ofeconomic agents in the Central Bank can de-anchor. We investigate the influenceof regulatory policies on inflationary dynamics resulting from three exogenousshocks, calibrated on those that followed the COVID-19 pandemic: aproduction/consumption shock due to COVID-related lockdowns, a supply-chainshock, and an energy price shock exacerbated by the Russian invasion ofUkraine. By exploring the impact of these shocks under different assumptionsabout monetary policy efficacy and transmission channels, we review variousexplanations for the resurgence of inflation in the United States, includingdemand-pull, cost-push, and profit-driven factors. Our main results arefour-fold: (i) without appropriate fiscal policy, the shocked economy can takeyears to recover, or even tip over into a deep recession; {(ii) the success ofmonetary 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 andunemployment, leading to a narrow window of ``optimal'' policy responses due tothe trade-off between inflation and unemployment;} (iv) the two most sensitivemodel parameters are those describing wage and price indexation. The results ofour study have implications for Central Bank decision-making, and offers aneasy-to-use tool that may help anticipate the consequences of differentmonetary and fiscal policies.

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