On transmission channels of energy prices and monetary policy shocks to household consumption: Evidence from India

Pragati Priya and Chandan Sharma

Energy Economics, 2024, vol. 136, issue C

Abstract: This study examines the channels of transmission of unanticipated energy price changes and monetary policy shocks to household consumption decisions. We use a large and dynamic panel data set of Indian households for the analysis. Our findings show that both shocks have adverse effects on aggregate consumption and its categories. Furthermore, rising energy prices and monetary tightening policies disproportionately affect the relatively elastic components of household spending, such as various services, rather than the relatively inelastic demand, such as fuel and food. We also find that consumption of durable goods is more susceptible to these shocks than non-durables owing to higher operating costs. Nevertheless, our findings show a positive interaction effect of monetary and energy shocks on household spending. Both shocks together are perceived as an indication of a booming economy, along with an effort from monetary authorities to safeguard against unanticipated inflation, which in turn boosts household confidence in the fast-growing economy. Additionally, we also examine the effects of these shocks on various indices of household sentiment to validate the presence of the sentiment channel of transmission of these shocks on spending. Lastly, using realized and conditional volatility measures, we find that the effects of these shocks on household spending are exacerbated during periods of high energy price volatility, owing to increased cautiousness effects.

Keywords: Energy prices; Monetary policy; Consumption; Household panel data (search for similar items in EconPapers)
JEL-codes: E21 E52 Q43 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324004316

DOI: 10.1016/j.eneco.2024.107723

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