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To eat or to heat: are energy bills squeezing people's spending?

Author

Listed:
  • Andrea Colabella

    (Bank of Italy)

  • Luciano Lavecchia

    (Bank of Italy)

  • Valentina Michelangeli

    (Bank of Italy)

  • Raffaella Pico

    (Bank of Italy)

Abstract

This paper presents an assessment of the energy price shocks that hit Italian households starting in mid-2021 and their impact on households' financial vulnerability. First, we estimate the price elasticity of electricity and heating demand and compute the variation between 2020 and 2022 within the framework presented in Faiella and Lavecchia (2021b). Second, we study how those variations affected households' financial vulnerability, based on an extension of the modelling strategy proposed by Faiella et al. (2022). Our results indicate that, if energy price elasticity is not duly accounted for, financial vulnerability rises excessively on the heels of an energy price upsurge. In contrast, when consumption rebalancing within a dynamic microsimulation model is taken into account, financial vulnerability remains rather low and in line with supervisory data. While the risks for financial stability associated with energy shocks are therefore limited, this occurs at the of expense of household consumption and welfare.

Suggested Citation

  • Andrea Colabella & Luciano Lavecchia & Valentina Michelangeli & Raffaella Pico, 2023. "To eat or to heat: are energy bills squeezing people's spending?," Questioni di Economia e Finanza (Occasional Papers) 800, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_800_23
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2023-0800/QEF_800_23.pdf
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    climate stress test; financial vulnerability; inflation; demand elasticity;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G5 - Financial Economics - - Household Finance
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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