Inflation Target Credibility and Inflation Regimes in a Heterogeneous Agent-Based Model

Inflation targeting has become one of the most commonly used frameworks by Central Banks to achieve price stability. In this context, the degree of alignment between inflation expectations and actual inflation is a crucial gauge of Central Bank credibility. This study introduces a Macroeconomic Agent-Based Model (MABM) featuring a population of heterogeneous individuals, described using the ODD (Overview, Design concepts, Details) protocol, which enhances clarity and reproducibility. Within this model, individuals form inflation expectations and assess the credibility of the Central Bank, which endogenously sets its inflation target within the model. The model allows individuals to dynamically adjust the degree of credibility they attribute to the Central Bank. Credibility is shaped by external factors, such as the gap between target and actual inflation, as well as individual tolerance to these deviations. This approach facilitates the analysis of confidence crises within a dynamic framework. Our results highlight that individuals’ tolerance for deviations from the inflation target has a decisive impact on macroeconomic stability, potentially guiding central banks in tailoring communication strategies. Higher tolerance levels result in increased forecast errors and greater heterogeneity in expectations. Additionally, changes in credibility exhibit asymmetry: shocks lead to a rapid decline in confidence, whereas recovery is a slower process, driven by the interplay between inflation dynamics and agents’ expectations.