IIASA works with the Bank of Canada to strengthen monetary policy using agent-based modeling

Economic models are crucial tools in the policymaking process of central banks. The newly developed Canadian behavioral agent-based model (CANVAS) is based on IIASA research and utilizes agent-based modeling, a technique that simulates the interactions of individual agents (e.g., individuals, corporations, and government entities) to provide a macro level picture of the state of the economy.

This approach has so far not been widely used by central banks. It moves away from traditional assumptions of rational expectations– where all agents are perfectly informed and act in their self-interest. Instead, it  introduces a more realistic scenario with diverse behaviors among households and firms.

CANVAS proved particularly valuable during the COVID-19 pandemic, enabling the Bank of Canada to make more accurate inflation projections, both during the crisis and in the subsequent period of high inflation.

In addition, the Bank of Canada added this model to their core macroeconomic models, marking the first instance where a major central bank has adopted an agent-based model to inform monetary policy. Its success has  sparked interest from several other central banks, including the Bank of Italy, the Bank of Spain, and the Hungarian Central Bank, which are now adapting the model for their own use.