Energy price shocks and stabilization policies in a multi-agent macroeconomic model for the Euro Area

Enrico Turco, Davide Bazzana, Massimiliano Rizzati, Emanuele Ciola and Sergio Vergalli
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Enrico Turco: Fondazione Eni Enrico Mattei and Complexity Lab in Economics, Department of Economics and Finance, Catholic University of Milan
Davide Bazzana: Fondazione Eni Enrico Mattei, Department of Economics and Management, University of Brescia
Massimiliano Rizzati: Fondazione Eni Enrico Mattei

No 2022.25, Working Papers from Fondazione Eni Enrico Mattei

Abstract: Soaring energy prices since fall 2021 have prompted European governments to introduce policy measures to support households and businesses. In this paper, we employ the MATRIX model, a multi-sector and multi-agent macroeconomic model calibrated on the Euro Area, to analyze the economic and distributional effects of different types of macro-stabilization policies in response to energy price shocks. Simulation results show that, in the absence of stabilization policies, an increase in fossil fuel price would lead to a sharp growth in price inflation and a severe contraction in real GDP, followed by a slow but steady recovery. We find no significant effects of generalized tax cuts and household subsidies, while firm subsidies promote a faster recovery but at the expense of greater financial instability in the medium term due to the resulting market distortions. If timely adopted, government-funded energy tariff reduction is the most effective policy in mitigating GDP losses at relatively low public costs, especially if coupled with an extra-profit tax on energy firms. Energy entrepreneurs benefit from rising fuel prices in all policy scenarios, but to a lesser extent under energy tariff cuts and windfall profits tax, favouring, in that case, workers and downstream firms owners.

Keywords: Energy shocks; Policy analysis; Agent-based models; Macroeconomic dynamics (search for similar items in EconPapers)
JEL-codes: C63 E63 O13 Q43 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-eec and nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Energy price shocks and stabilization policies in a multi-agent macroeconomic model for the Euro Area (2022)
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