Explaining the lead-lag pattern in the money-inflation relationship: a microsimulation approach

We set up an agent-based model where the parameters of firms' pricing heuristics are determined through evolutionary learning. We argue that there are several key ingredients that result in the emergence of the lead-lag pattern in the money growth-inflation relationship. First, a realistic representation of money creation through a lending mechanism is essential. Second, there must be considerable heterogeneity in the distribution of newly created deposits and in the associated changes in demand at the individual firm level.