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Energy shortages and aggregate demand: Output loss and unequal burden from HANK

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  • Pieroni, Valerio

Abstract

I study the effects of a reduction in energy supply using a quantitative Heterogeneous Agents New Keynesian (HANK) model with energy consumption by households and firms. I find that changes in aggregate demand due to an increase in energy prices and labor market adjustments amplify the macroeconomic effects of the energy shock, but these effects remain manageable. In the model a 10% reduction in the energy supply leads to a Gross National Income (GNI) loss in range between 0.8% and 2%. The economic burden is highly nonlinear across the income distribution: most households face similar and relatively contained costs, while low-income households bear the heaviest burden. I show that monetary and fiscal policy can mitigate the economic costs and the unequal effects of energy shortages.

Suggested Citation

  • Pieroni, Valerio, 2023. "Energy shortages and aggregate demand: Output loss and unequal burden from HANK," European Economic Review, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:eecrev:v:154:y:2023:i:c:s0014292123000570
    DOI: 10.1016/j.euroecorev.2023.104428
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    Keywords

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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