Limited (energy) supply, monetary policy, and sunspots

Nils Gornemann, Sebastian Hildebrand and Keith Kuester

European Economic Review, 2024, vol. 168, issue C

Abstract: In a simple New Keynesian open economy setting, we analyze how local input shortages influence policy transmission and equilibrium determinacy. Shortages increase the elasticity of the local price of the scarce factor to domestic economic activity, affecting the cyclicality of marginal costs and incomes. As a result, the slope of both the Phillips and the IS curve is altered, crucially influencing monetary and fiscal policy transmission. These changes are affected by factor ownership and propensities to consume. Theoretically, shortages can also raise the risk of self-fulfilling fluctuations if a rising price of the constrained factor boosts incomes for agents with high propensities to consume. We illustrate these channels for the 2022 German energy crisis.

Keywords: Supply constraints; Heterogeneous households; Monetary transmission; Transfer multiplier; Sunspots (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 F41 Q43 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Limited (Energy) Supply, Monetary Policy, and Sunspots (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:168:y:2024:i:c:s0014292124001521

DOI: 10.1016/j.euroecorev.2024.104823

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