Fiscal and macroprudential policies during an energy crisis

Romanos Priftis and Raphael Schoenle

No 3032, Working Paper Series from European Central Bank

Abstract: We construct a New-Keynesian E-DSGE model with energy disaggregation and financial intermediaries to show how energy-related fiscal and macroprudential policies interact in affecting the euro area macroeconomy and carbon emissions. When a shock to the price of fossil resources propagates through the energy and banking sector, it leads to a surge in inflation while lowering output and carbon emissions, absent policy interventions. By contrast, imposing energy production subsidies reduces both CPI and core inflation and increases aggregate output, while energy consumption subsidies only lower CPI inflation and reduce aggregate output. Carbon subsidies instead produce an intermediate effect. Given that both energy subsidies raise carbon emissions and delay the “green transition,” accompanying them with parallel macroprudential policy that taxes dirty energy assets in bank portfolios promotes “green” investment while enabling energy subsidies to effectively mitigate the adverse effects of supply-type shocks, witnessed in recent years in the EA. JEL Classification: E52, E62, H23, Q43, Q58

Keywords: DSGE model; energy sector; energy subsidies; financial frictions; macroprudential policy (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ene, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253032

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