Energy prices and household heterogeneity: monetary policy in a Gas-TANK

Jenny Chan, Sebastian Diz () and Derrick Kanngiesser ()
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Sebastian Diz: Central Bank of Paraguay
Derrick Kanngiesser: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1041, Bank of England working papers from Bank of England

Abstract: How does household heterogeneity affect the transmission of an energy price shock? What are the implications for monetary policy? We develop a small, open-economy TANK model that features labour and an energy import good as complementary production inputs (Gas-TANK). Given such complementarities, higher energy prices reduce the labour share of total income. Due to borrowing constraints, this translates into a drop in aggregate demand. Higher price flexibility insures firm profits from adverse energy price shocks, further depressing labour income and demand. We illustrate how the transmission of shocks in a RANK versus a TANK depends on the degree of complementarity between energy and labour in production and the degree of price rigidities. Optimal monetary policy is less contractionary in a TANK and can even be expansionary when credit constraints are severe. Finally, the contractionary effect of an energy price shock on demand cannot be generalised to alternate supply shocks, as the specific nature of the supply shock affects how resources are redistributed in the economy.

Keywords: Energy prices; inflation; household heterogeneity; monetary policy (search for similar items in EconPapers)
JEL-codes: E21 E23 E31 E52 F41 (search for similar items in EconPapers)
Pages: 80 pages
Date: 2023-09-22
New Economics Papers: this item is included in nep-dge, nep-ene, nep-fdg, nep-mac, nep-mon and nep-opm
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Related works:
Journal Article: Energy prices and household heterogeneity: Monetary policy in a Gas-TANK (2024)
Working Paper: Energy Prices and Household Heterogeneity: Monetary Policy in a Gas-TANK (2022)
Working Paper: Energy Prices and Household Heterogeneity: Monetary Policy in a Gas-TANK (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1041

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