Reallocation, productivity, and monetary policy in an energy crisis

Boris Chafwehé (), Andrea Colciago () and Romanos Priftis
Additional contact information
Boris Chafwehé: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Andrea Colciago: University of Milan-Bicocca, Postal: Piazza dell'Ateneo Nuovo, 1, 20126 Milano MI, Italy

No 1091, Bank of England working papers from Bank of England

Abstract: This paper introduces a New Keynesian multi-sector industry model that integrates firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We investigate the effects of a sustained increase in fossil fuel prices on sectoral size, labour productivity, and inflation. A hike in the price of fossil resources results in higher energy prices. Due to ex-ante heterogeneity in energy intensity in production, the profitability of sectors is impacted asymmetrically. As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labour productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs. This policy entails a higher impact cost in terms of output and lower average productivity, but leads to a faster recovery in business dynamism. Thus, our results suggest that monetary policy faces a trade-off between stabilising aggregate activity and business dynamism.

Keywords: Energy; productivity; firm entry and exit; monetary policy (search for similar items in EconPapers)
JEL-codes: E62 L16 O33 Q43 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2024-08-16
New Economics Papers: this item is included in nep-dge, nep-eff, nep-ene and nep-mon
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Related works:
Journal Article: Reallocation, productivity, and monetary policy in an energy crisis (2025)
Working Paper: Reallocation, Productivity, and Monetary Policy in an Energy Crisis (2024)
Working Paper: Reallocation, productivity, and monetary policy in an energy crisis (2024)
Working Paper: Reallocation, Productivity, and Monetary Policy in an Energy Crisis (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1091

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