CANVAS: A Canadian Behavioral Agent-Based Model
Economic models are valuable to central banks for conducting projection and policy analysis. The Bank of Canada’s current economic projection relies mainly on two complementary large-scale models—the Terms-of-Trade Economic Model (ToTEM) and the Large Empirical and Semi-structural model (LENS). However, introducing both household and firm differences at detailed levels and realistic behavior in these models can be challenging, both in theory and in practice.
In this paper, we contribute to the development of Bank’s next generation of models with CANVAS, a Canadian behavioral agent-based model. We simulate individual behaviours of many different agents to provide an overall picture of the Canadian economy. CANVAS improves on earlier models in three ways: introducing household and firm differences at individual level, moving beyond rational expectations by incorporating realistic behaviours of real people and business, and modelling the Canadian production network.
Finer details of difference (on demographic data like sex, age, occupation, and household balance sheets) can help policy-makers understand households’ consumption and employment decisions. By modelling the strategic price setting behaviour of individual firms with the lab and survey evidence, we also capture inflation dynamics through factors such as demand, supply, and expectation. The network structure in CANVAS connects agents’ different characteristics and their behaviour, putting it among the first class of macroeconomic agent-based models that can compete with benchmark models in out-of-sample forecasting performance. These features make CANVAS a distinct complement to the current models, with greater ability for forecasting and policy analysis.