Reallocation, Productivity, and Monetary Policy in an Energy Crisis

Boris Chafwehe', Andrea Colciago and Romanos Priftis

No 534, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: This paper proposes a New Keynesian multi-sector industry model incorporating firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We examine the impacts of a sustained fossil fuel price hike on sectoral size, labor productivity, and inflation. Final good sectors are ex-ante heterogeneous in terms of energy intensity in production. For this reason, a higher relative price of fossil resources affects their profitability asymmetrically. Further, it entails a substitution effect that leads to a greener mix of resources in the production of energy. 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 while promoting sectoral reallocation. While this entails a higher impact cost in terms of output and lower average productivity, it leads to a faster recovery in business dynamism in the medium-term.

Keywords: Energy; productivity; firm entry and exit; monetary policy. (search for similar items in EconPapers)
JEL-codes: E62 L16 O33 (search for similar items in EconPapers)
Pages: 49
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-eff, nep-ene, nep-inv and nep-mon
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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)
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