The role of monetary policy and financial constraints in domestic energy price increases: a DSGE approach

Seyed Ali Madanizadeh and Mehran Mahmoudi

Journal of Economic Studies, 2025, vol. 53, issue 8, 1538-1556

Abstract: PurposeThis study examines the macroeconomic effects of domestic energy price shocks in the presence of financial constraints, frictions and monetary policy responses.Design/methodology/approachA DSGE model with nominal rigidities, financial constraints, frictions and energy shocks is developed and calibrated to the Iranian economy as a representative oil-exporting country.FindingsThe results show that monetary policy plays a crucial role in mitigating inflationary pressures from energy price shocks. A 10% increase in firm energy prices raises first-period inflation by 4.24 percentage points under a passive central bank but by only 0.57 percentage points with an active policy, and 0.28 percentage points when financial constraints are relaxed. The collateral channel is central in this model: higher energy prices raise capital value, relax borrowing constraints, and increase investment even as consumption falls, cushioning output.Originality/valueThe study contributes by incorporating collateral-based financial constraints and fiscal redistribution into the analysis of energy price shocks. It provides new evidence on how energy shocks propagate through both real and financial channels, offering important insights for policymakers in oil-exporting economies seeking to balance inflation control, output stabilization, and financial stability.

Keywords: Monetary policy; Energy prices; Financial constraints; DSGE model (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-06-2025-0389

DOI: 10.1108/JES-06-2025-0389

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