Monetary and fiscal policy responses to fossil fuel price shocks

Anna Bartocci, Alessandro Cantelmo, Pietro Cova, Alessandro Notarpietro and Massimiliano Pisani

No 1431, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We use a dynamic equilibrium model featuring different sources of energy to assess the macroeconomic effects, in the euro area, of a temporary reduction in excise taxes on fossil fuels and an increase in lump-sum transfers to the poorest ('hand-to-mouth') households, and of raising the monetary policy rate in response to a temporary increase in the global prices of fossil fuels. In the model, the central bank should raise the monetary policy rate to stabilize inflation even if excise taxes are lowered, in particular if price- and wage-setting decisions are not strongly anchored to the central bank's inflation target. Lump-sum transfers to hand-to-mouth households can stabilize their consumption with limited inflationary effects.

Keywords: monetary policy; fiscal policy; dynamic general equilibrium model; euro area; fossil fuel price shocks (search for similar items in EconPapers)
JEL-codes: D58 E52 E62 Q43 (search for similar items in EconPapers)
Date: 2023-12
New Economics Papers: this item is included in nep-cba, nep-ene and nep-mon
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Journal Article: Monetary and fiscal policy responses to fossil fuel price shocks (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1431_23

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