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Heterogeneous effects of monetary tightening in response to energy price shocks

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  • Bobasu, Alina
  • Dobrew, Michael
  • Repele, Amalia

Abstract

This article analyses how monetary policy shapes the aggregate and distributional effects of an energy price shock. Based on the observed heterogeneity in consumption exposures to energy and household wealth, we build a quantitative small open-economy Heterogeneous Agent New Keynesian (HANK) model that matches salient features of the euro area data. The model incorporates energy as both a consumption good for households with non-homothetic preferences as well as a factor input into production with input complementarities. Independently of policy, energy price shocks always reduce aggregate consumption. Households with little wealth are more adversely affected through both a decline in labour income as well as negative direct price effects. Active policy responses raising rates in response to inflation amplify aggregate outcomes through a reduction in aggregate demand, but speed up the recovery by enabling households to rebuild wealth through higher returns on savings. However, low-wealth households are also adversely affected by having less savings from which to rebuild wealth and instead lose out due to further declining labour income. JEL Classification: E52, F41, Q43

Suggested Citation

  • Bobasu, Alina & Dobrew, Michael & Repele, Amalia, 2024. "Heterogeneous effects of monetary tightening in response to energy price shocks," Research Bulletin, European Central Bank, vol. 123.
  • Handle: RePEc:ecb:ecbrbu:2024:0123:
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    References listed on IDEAS

    as
    1. Jenny Chan & Sebastian Diz & Derrick Kanngiesser, 2023. "Energy prices and household heterogeneity: monetary policy in a Gas-TANK," Bank of England working papers 1041, Bank of England.
    2. Chan, Jenny & Diz, Sebastian & Kanngiesser, Derrick, 2024. "Energy prices and household heterogeneity: Monetary policy in a Gas-TANK," Journal of Monetary Economics, Elsevier, vol. 147(S).
    3. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    4. Pieroni, Valerio, 2023. "Energy shortages and aggregate demand: Output loss and unequal burden from HANK," European Economic Review, Elsevier, vol. 154(C).
    5. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 707-734.
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    Cited by:

    1. Emrah I. Cevik & Sel Dibooglu & Max Gillman & Szilard Benk, 2025. "Granger predictability of real oil prices by us money and inflation in Markov-switching regimes," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 15(1), pages 29-52, March.

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    More about this item

    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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