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Limited (Energy) Supply, Monetary Policy, and Sunspots

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Abstract

In a simple New Keynesian open economy setting, we analyze how local input shortages influence policy transmission and equilibrium determinacy. Shortages increase the elasticity of the local price of the scarce factor to domestic economic activity, affecting the cyclicality of marginal costs and incomes. As a result, the slope of both the Phillips and the IS curve is altered, crucially influencing monetary and fiscal policy transmission. These changes are affected by factor ownership and propensities to consume. Theoretically, shortages can also raise the risk of self-fulfilling fluctuations if a rising price of the constrained factor boosts incomes for agents with high propensities to consume. We illustrate these channels for the 2022 German energy crisis.

Suggested Citation

  • Nils M. Gornemann & Sebastian Hildebrand & Keith Kuester, 2024. "Limited (Energy) Supply, Monetary Policy, and Sunspots," International Finance Discussion Papers 1395, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1395
    DOI: 10.17016/IFDP.2024.1395
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    More about this item

    Keywords

    Supply constraints; Heterogeneous households; Monetary transmission; Transfer multiplier; Sunspots;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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