Inflation is not equal for all: the heterogenous effects of energy shocks

Francesco Corsello () and Marianna Riggi ()
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Francesco Corsello: Bank of Italy
Marianna Riggi: Bank of Italy

No 1429, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Energy price shocks broaden inflation inequality, measured by the gap between consumer prices for households at the bottom and top of the expenditure distribution, which is due to different consumption baskets. We provide a VAR-based quantification of the impact of energy shocks on inflation inequality. We then develop and estimate a general equilibrium two-agent model with imported energy to rationalize the empirical results and show why this effect becomes stronger when monetary policy responds aggressively to inflation. Indeed, though less affluent consumers too benefit from the containment of inflation resulting from monetary policy action, they do so to a lesser extent than more affluent ones, given the relatively lower share of consumption spent on items whose prices are sensitive to cyclical conditions. Our results call for the need to complement the monetary policy response with targeted fiscal measures.

Keywords: energy shocks; inflation inequality; VAR; dynamic general equilibrium; two-agent model (search for similar items in EconPapers)
JEL-codes: E31 E32 E50 E52 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ene and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1429_23

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