Energy price shocks, unemployment, and monetary policy

Nicolò Gnocato

No 1450, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper studies the optimal conduct of monetary policy in the presence of heterogeneous exposure to energy price shocks between the employed and the unemployed, as it is documented by data from the euro-area Consumer Expectations Survey: higher energy prices weigh more on the unemployed, who consume less and devote a higher proportion of their consumption to energy. I account for this evidence into a tractable Heterogeneous-Agent New Keynesian (HANK) model with Search and Matching (S&M) frictions in the labour market, and energy as a complementary input in production and as a non-homothetic consumption good: energy price shocks weigh more on the jobless, who consume less due to imperfect unemployment insurance and, since preferences are non-homothetic, devote a higher share of this lower consumption to energy. Households' heterogeneous exposure to rising energy prices induces an endogenous trade-off for monetary policy, whose optimal response involves partly accommodating core inflation so as to indirectly sustain employment and, therefore, prevent workers from becoming more exposed to the shock through unemployment.

Keywords: heterogeneous agents; New Keynesian; unemployment risk; energy shocks; optimal monetary policy; endogenous trade-off (search for similar items in EconPapers)
JEL-codes: E21 E24 E31 E32 E52 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-eec, nep-ene, nep-lab and nep-mon
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