Energy Price Shocks, Conflict Inflation, and Income Distribution in a Three-sector Model

Rafael Wildauer, Karsten Kohler, Adam Aboobaker and Alexander Guschanski

No PKWP2309, Working Papers from Post Keynesian Economics Society (PKES)

Abstract: The paper presents a model of conflict inflation to investigate the distributional effects of energy price shocks. We argue that periods of high inflation are always periods of significant redistribution of income. We analyse how such redistribution occurs along two dimensions: between workers and firms and between sectors of the economy. To study the distributional outcomes of the recent inflationary episode, we build a three-sector model comprising a domestic energy sector which provides inputs for a goods and a services sector. The model is calibrated to US sectoral data with the Method of Simulated Moments. While energy prices are set internationally, non-energy prices and nominal wages are set by firms and workers, giving rise to conflicting claims over the distribution of income. We consider three shocks that trigger inflationary distributional conflict: an energy price shock combined with demand and supply shocks to the goods sector. We find that the recent inflationary episode constitutes a price-wage rather than a wage-price spiral. The combined shocks induce non-energy firms to raise prices, which undermines real wages, and redistributes income towards firms. The sectoral demand shift towards goods in combination with pandemic-related supply bottlenecks further raises mark-ups, accelerating inflation and leading to divergence in sectoral profit margins. We compare three anti-inflationary policies: redistributing windfall profits to workers, nominal wage restraint, and aggregate demand contraction through monetary or fiscal policy. The redistribution of profits via a windfall tax is most effective in reducing inflation without reinforcing reductions in employment and labour shares.

Keywords: energy price shocks; inflation; income distribution; multi-sector model; wageprice spiral; price-wage spiral (search for similar items in EconPapers)
JEL-codes: E24 E31 J30 (search for similar items in EconPapers)
Pages: 30
Date: 2023-08
New Economics Papers: this item is included in nep-ene, nep-lma and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Energy price shocks, conflict inflation, and income distribution in a three-sector model (2023)
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