Reallocation, productivity, and monetary policy in an energy crisis

Andrea Colciago, Romanos Priftis and Boris Chafwehé

No 2961, Working Paper Series from European Central Bank

Abstract: This paper introduces a New Keynesian multi-sector industry model that integrates firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We investigate the effects of a sustained increase in fossil fuel prices on sectoral size, labor productivity, and inflation. A hike in the price of fossil resources results in higher energy prices. Due to ex-ante heterogeneity in energy intensity in production, the profitability of sectors is impacted asymmetrically.As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs. This policy entails a higher impact cost in terms of output and lower average productivity, but leads to a faster recovery in business dynamism. Thus, our results suggest that monetary policy faces a trade-off between stabilizing aggregate activity and business dynamism. JEL Classification: E62, L16, O33, Q43

Keywords: energy; firm entry and exit; monetary policy; productivity (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-dge, nep-ene and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2961~67a805bed0.en.pdf (application/pdf)

Related works:
Journal Article: Reallocation, productivity, and monetary policy in an energy crisis (2025)
Working Paper: Reallocation, productivity, and monetary policy in an energy crisis (2024)
Working Paper: Reallocation, Productivity, and Monetary Policy in an Energy Crisis (2024)
Working Paper: Reallocation, Productivity, and Monetary Policy in an Energy Crisis (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242961

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().