Energy price surges and inflation: Fiscal policy to the rescue?

Christian Glocker and Philipp Wegmüller
Authors registered in the RePEc Author Service: Philipp Wegmueller

Journal of International Money and Finance, 2024, vol. 149, issue C

Abstract: Motivated by the fiscal policy measures taken by euro zone governments during the 2021/2022 energy crisis, we examine their ability to counter inflationary surges resulting from energy price hikes in energy-importing economies. We use a calibrated small-open economy model in which monetary policy fixes the exchange rate. Subsidies on the sale of energy and on firms' energy expenditures are among the most effective instruments. They reduce marginal costs and limit the pass-through of the price hike which attenuates inflation and stabilizes output and the current account. While inflation indexation of prices aggravates the adverse effects, it renders consumption tax cuts more effective as they attenuate the shock's domestic circulation.

Keywords: Inflation; Energy prices; Inflation indexation; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E31 E32 E62 F44 F45 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:149:y:2024:i:c:s0261560624001888

DOI: 10.1016/j.jimonfin.2024.103201

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