Understanding Post-Pandemic Inflation Dynamics with a Behavioral Macroeconomic Model of the Canadian Economy

This paper analyses the post-pandemic inflation dynamics in Canada using a behavioral macroeconomic model of the Bank of Canada. Two crucial behavioral assumptions in line with empirical evidence characterize the model: firms make price-quantity decisions according to a simple heuristic rule and form expectations using adaptive learning. The paper shows that post-pandemic inflation can be explained by these simple heuristics and traced back to the lifting of economic restrictions in mid-2020, triggering demand-pull inflation. This result suggests that the cost-push inflation in 2021 and beyond actually originated from a demand-pull mechanism, making the latter the primary driver of post-pandemic inflation