Managing an Energy Shock: Fiscal and Monetary Policy

Adrien Auclert, Hugo Monnery, Matthew Rognlie and Ludwig Straub

No 18340, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies the macroeconomic effects of energy price shocks in energy-importing economies using a heterogeneous-agent New Keynesian model. When MPCs are realistically large and the elasticity of substitution between energy and domestic goods is realistically low, increases in energy prices depress real incomes and cause a recession, even if the central bank does not tighten monetary policy. Imported energy inflation can spill over to wage inflation through a wage-price spiral, but this does not mitigate the decline in real wages. Monetary tightening has limited effect on imported inflation when done in isolation, but can be powerful when done in coordination with other energy importers by lowering world energy demand. Fiscal policy, especially energy price subsidies, can isolate individual energy importers from the shock, but it has large negative externalities on other economies.

Keywords: Energy prices; Aggregate demand; Monetary policy; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E52 F42 Q43 (search for similar items in EconPapers)
Date: 2023-08
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Working Paper: Managing an Energy Shock: Fiscal and Monetary Policy (2023)
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