Protecting households from energy shocks: wage indexation and fiscal policy

Charles de Beauffort (), Gregory de Walque (), Thomas Lejeune (), Jolan Mohimont () and Ansgar Rannenberg ()
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Charles de Beauffort: National Bank of Belgium, Economics and Research Department
Gregory de Walque: National Bank of Belgium, Economics and Research Department
Thomas Lejeune: National Bank of Belgium, Economics and Research Department
Jolan Mohimont: National Bank of Belgium, Economics and Research Department
Ansgar Rannenberg: National Bank of Belgium, Economics and Research Department

No 500, Working Paper Research from National Bank of Belgium

Abstract: This paper evaluates the role of automatic wage indexation following an imported energy price shock in a small open economy belonging to a monetary union. We develop a two-agent New Keynesian model with energy in consumption and production and featuring Ricardian and hand-to-mouth (HtM) households. Wage indexation protects purchasing power through an income channel but impairs the competitiveness of domestic firms, reduces employment, and affects consumption through real interest rate dynamics. We show that although universal indexation mitigates the rise in inequality after an energy shock, HtM consumption benefits only partially because adverse general equilibrium effects offset some of the gain in real wages. Targeting indexation at vulnerable households alleviates the cost for firms but creates distortions in the labour market that may harm the disposable income of indexed workers. Among fiscal instruments, both wage-cost and energy-price subsidies are effective in supporting HtM consumption and reduce welfare inequalities among households. Stabilising energy prices is particularly beneficial for households with a high share of energy in their consumption, especially when a significant portion of their consumption expenditures is dedicated to essential energy needs.

Keywords: Wage indexation; Energy prices; Cost-of-living crisis; Agent heterogeneity; Fiscal policy; Welfare analysis (search for similar items in EconPapers)
JEL-codes: E21 E31 F41 H24 J38 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:202610-500

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