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Monetary and fiscal policy responses to fossil fuel price shocks

Author

Listed:
  • Anna Bartocci

    (Bank of Italy)

  • Alessandro Cantelmo

    (Bank of Italy)

  • Pietro Cova

    (Bank of Italy)

  • Alessandro Notarpietro

    (Bank of Italy)

  • Massimiliano Pisani

    (Bank of Italy)

Abstract

We use a dynamic equilibrium model featuring different sources of energy to assess the macroeconomic effects, in the euro area, of a temporary reduction in excise taxes on fossil fuels and an increase in lump-sum transfers to the poorest ('hand-to-mouth') households, and of raising the monetary policy rate in response to a temporary increase in the global prices of fossil fuels. In the model, the central bank should raise the monetary policy rate to stabilize inflation even if excise taxes are lowered, in particular if price- and wage-setting decisions are not strongly anchored to the central bank's inflation target. Lump-sum transfers to hand-to-mouth households can stabilize their consumption with limited inflationary effects.

Suggested Citation

  • Anna Bartocci & Alessandro Cantelmo & Pietro Cova & Alessandro Notarpietro & Massimiliano Pisani, 2023. "Monetary and fiscal policy responses to fossil fuel price shocks," Temi di discussione (Economic working papers) 1431, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1431_23
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2023/2023-1431/en_tema_1431.pdf
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    References listed on IDEAS

    as
    1. Günter Coenen & Roland Straub, 2005. "Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area," International Finance, Wiley Blackwell, vol. 8(3), pages 435-470, December.
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    More about this item

    Keywords

    monetary policy; fiscal policy; dynamic general equilibrium model; euro area; fossil fuel price shocks;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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