 Energy price shocks, unemployment, and monetary policyJournal of Monetary Economics, 2025, vol. 151, issue C Abstract: Does monetary policy face a trade-off between stabilizing inflation and unemployment as soaring energy prices hit the unemployed harder than the employed? Data from the euro-area Consumer Expectations Survey show that job losses not only force workers to lower their consumption but also to devote a higher proportion of it to energy. I incorporate this evidence into a tractable heterogeneous-agent New Keynesian model with labor market frictions, where energy acts as both a complementary input in production and a non-homothetic consumption good. Unemployment forces workers to consume less due to imperfect insurance and, since preferences are non-homothetic, to allocate a larger consumption share to energy. The heterogeneous exposure of the labor force to rising energy prices induces an endogenous trade-off for monetary policy: the optimal response involves partly accommodating inflation to limit the increase in unemployment and, hence, prevent workers from becoming more exposed to the shock. Keywords: Heterogeneous agents; New Keynesian; Unemployment risk; Energy shocks; Optimal monetary policy; Endogenous trade-off (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:151:y:2025:i:c:s0304393225000054 DOI: 10.1016/j.jmoneco.2025.103734 Access Statistics for this article Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser More articles in Journal of Monetary Economics from Elsevier |
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