Working Paper: CEPR ID: DP18557
Authors: Christian Bayer; Alexander Kriwoluzky; Gernot Müller; Fabian Seyrich
Abstract: The distributional and disruptive effects of energy supply shocks are potentially large. We study the effectiveness of alternative fiscal responses in a two-country HANK model that we calibrate to the euro area. Energy subsidies can stabilize the domestic economy, but are fiscally costly and generate adverse spillovers to the rest of the monetary union: What the subsidizing country gains, the other countries lose. Transfers based on historical energy consumption in the form of a Hicks/Slutsky compensation are less effective domestically as subsidies but do not harm economic activity abroad. In addition, transfers increase welfare at Home while subsidies reduce welfare.
Keywords: energy crisis; subsidies; transfers
JEL Codes: D31; E64; F45; Q41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| energy subsidies (H23) | stabilize domestic economy (E63) |
| energy subsidies (H23) | limit recessionary impact on consumption (E21) |
| energy subsidies (H23) | limit recessionary impact on GDP (E62) |
| energy subsidies (H23) | increase energy prices abroad (F69) |
| increased demand in home country (F29) | raise energy prices abroad (Q41) |
| transfers based on historical energy consumption (L97) | do not harm economic activity in foreign country (F69) |
| transfers based on historical energy consumption (L97) | increase welfare at home (I38) |
| subsidy policy (H20) | shift burden of adjustment from poorer households to richer ones (H31) |
| transfer policy (F16) | mitigate adverse distributional impact of the shock (D39) |