 The paradox of fossil fuel subsidiesWilliam Ginn Economic Analysis and Policy, 2024, vol. 83, issue C, 333-358 Abstract: Fossil fuel subsidies represent a significant and widespread fiscal tool that governments can employ to maintain stability in domestic price levels. We develop and estimate a Bayesian dynamic stochastic general equilibrium (DSGE) model tailored for Malaysia, a net-exporting energy economy that captures this key channel of fiscal policy intervention. Fossil fuel price subsidies are often motivated as a means to stabilize vulnerable households, yet the government of Malaysia does not have a targeting policy. Accordingly, we use the model to address how consumption responds to an increase in inflation driven by a fossil fuel price shock. The results indicate that, while a fossil fuel price subsidy stabilizes consumption, we find that a subsidy can ”crowd out” non-energy consumption as fiscal intervention increases. Furthermore, we find that while aggregate welfare increases with fiscal stabilization, the highest level of welfare is achieved with targeted subsidies, a contradiction which questions the merit of the current Malaysian energy policy. Keywords: Monetary policy; Commodities; Fossil fuel energy price; Price stabilization; DSGE model (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:83:y:2024:i:c:p:333-358 DOI: 10.1016/j.eap.2024.06.001 Access Statistics for this article Economic Analysis and Policy is currently edited by Clevo Wilson More articles in Economic Analysis and Policy from Elsevier |
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