Energy shocks as Keynesian supply shocks: implications for fiscal policy

Enisse Kharroubi and Frank Smets

No 1120, BIS Working Papers from Bank for International Settlements

Abstract: This paper analyses the economic impact of and the optimal policy response to energy supply shocks in a flexible price model with heterogeneous households. We introduce energy as a consumption good on the demand side and as an input to production on the supply side. A distinguishing feature is that, in line with empirical evidence, we allow households' energy demand to be non-homothetic. The model provides three main insights. First, (negative) energy supply shocks act as a (negative) demand shock, or Keynesian supply shock, when three conditions are met: (i) household income heterogeneity is intermediate, neither too high nor too low; (ii) the fraction of poor and credit-constrained households is high and (iii) competition between firms is strong enough. Second, implementing the first-best allocation requires subsidising the poor and taxing the rich, and more so when the economy faces a negative energy shock. Last, issuing public debt can be part of the optimal policy response to a negative energy shock, if the shock is large and the economy's overall energy intensity is low.

Keywords: energy shocks; non-homothetic demand; heterogeneous households; fiscal policy; public debt (search for similar items in EconPapers)
JEL-codes: D31 E21 E32 E62 H3 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-dge and nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Energy shocks as Keynesian supply shocks: Implications for fiscal policy (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1120

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