Energy price shocks, monetary policy and inequality

Alina Bobasu, Michael Dobrew and Amalia Repele

European Economic Review, 2025, vol. 175, issue C

Abstract: We study how monetary policy shapes the aggregate and distributional effects of an energy price shock. Based on the observed heterogeneity in consumption exposures to energy and household wealth, we build a quantitative small open-economy HANK model that matches salient features of the Euro Area data. Our model incorporates energy as both a consumption good for households with non-homothetic preferences as well as a factor input into production with input complementarities. Independently of policy energy price shocks always reduce aggregate consumption. Households with little wealth are more adversely affected through both a decline in labor income as well as negative direct price effects. Active policy responses raising rates in response to inflation amplifies aggregate outcomes through a reduction in aggregate demand, but speeds up the recovery by enabling households to rebuild wealth through higher returns on savings. However, low-wealth households are further adversely affected as they have little savings to rebuild wealth from and instead loose due to further declining labor income.

Keywords: Energy prices; Open economy model; Heterogeneous agents; Monetary policy; Non-homothetic preferences (search for similar items in EconPapers)
JEL-codes: E52 F41 Q43 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:175:y:2025:i:c:s0014292125000364

DOI: 10.1016/j.euroecorev.2025.104986

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