Working Paper: NBER ID: w31543
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 price shock; macroeconomic effects; fiscal policy; monetary policy; New Keynesian model
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 |
|---|---|
| Energy price increases (Q41) | Decline in real incomes (E25) |
| Decline in real incomes (E25) | Recession (E32) |
| Energy price increases (Q41) | Recession (E32) |
| Imported energy inflation (Q41) | Wage inflation (J31) |
| Wage inflation (J31) | Decline in real wages (F66) |
| Limited individual monetary tightening (E49) | Ineffective in combating imported inflation (E31) |
| Coordinated monetary tightening among energy importers (F42) | Substantial reduction in world energy prices (Q41) |
| Fiscal policies (energy price subsidies) (H29) | Isolation from energy shocks (Q43) |
| Fiscal policies (energy price subsidies) (H29) | Negative externalities for other economies (F69) |