Working Paper: CEPR ID: DP18340
Authors: Adrien Auclert; Hugo Monnery; Matthew Rognlie; Ludwig Straub
Abstract: This paper studies the macroeconomic effects of energy price shocks in energy-importing economies using a heterogeneous-agent New Keynesian model. When MPCs are realistically large and the elasticity of substitution between energy and domestic goods is realistically low, increases in energy prices depress real incomes and cause a recession, even if the central bank does not tighten monetary policy. Imported energy inflation can spill over to wage inflation through a wage-price spiral, but this does not mitigate the decline in real wages. Monetary tightening has limited effect on imported inflation when done in isolation, but can be powerful when done in coordination with other energy importers by lowering world energy demand. Fiscal policy, especially energy price subsidies, can isolate individual energy importers from the shock, but it has large negative externalities on other economies.
Keywords: Energy Prices; Aggregate Demand; Monetary Policy; Fiscal Policy
JEL Codes: E52; F42; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in energy prices (Q41) | depress real incomes (E25) |
| depress real incomes (E25) | lead to a recession (E32) |
| increases in energy prices (Q41) | lead to a recession (E32) |
| imported energy inflation (Q41) | spill over to wage inflation (J39) |
| monetary tightening (E52) | limited effects on imported inflation (F69) |
| coordinated monetary policy (E61) | lower world energy demand (Q47) |
| fiscal policy measures (energy price subsidies) (H29) | cushion effects of energy price shocks domestically (Q43) |
| fiscal policy measures (energy price subsidies) (H29) | higher world energy prices when implemented broadly (F69) |