Inflation as an emergent phenomenon

2026-07-08

AI Summary

This study investigates how inflation spontaneously emerges in an endogenous-money economy through decentralized decision-making and credit-financed production. By constructing an agent-based model that integrates heterogeneous adaptive learning, cost-plus pricing, an endogenous monetary banking system, and a two-layer network structure—comprising both supply chains and bank–firm relationships—the paper simulates the dynamic process through which firms form price expectations under working capital constraints and financial frictions. The model successfully replicates multiple inflationary mechanisms, revealing how pricing cascades, feedback loops, and network topology jointly drive inflation cycles. In doing so, it elucidates the microfoundations of inflation as an emergent phenomenon in complex economic systems. This work is the first to unify these elements within a coherent framework, highlighting the critical roles of financial frictions and network interactions in the genesis of inflation.

Abstract

We develop an agent-based model in which inflation emerges from decentralized price-setting and credit-financed production in an endogenous-money economy. Firms operate under working-capital constraints, form market-based price expectations through heterogeneous adaptive learning, and set prices via cost-plus rules with endogenous mark-ups. Bank lending simultaneously creates deposits, while heterogeneous lending rates and credit rationing shape firms' financing costs and, through unit costs, their pricing decisions. The economy features interacting production and credit networks: intermediate-input linkages propagate cost shocks across supply chains, while bank--firm relationships transmit financial conditions across firms. The interaction of network-based pass-through, state-dependent pricing incentives, and evolving credit conditions generates inflationary regimes, including episodes driven by pricing cascades and feedback loops.

Problem

• inflation
• emergent phenomenon
• agent-based model
• endogenous money
• credit networks

Innovation

• agent-based modeling
• endogenous money
• credit networks
• pricing cascades
• heterogeneous adaptive learning