Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/311118 
Year of Publication: 
2024
Series/Report no.: 
ECB Working Paper No. 2967
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We study 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 HANK model that matches salient features of the Euro Area data. Our 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 labor income as well as negative direct price effects. Active policy responses raising rates in response to inflation amplifies aggregate outcomes through a reduction in aggregate demand, but speeds up the recovery by enabling households to rebuild wealth through higher returns on savings. However, low-wealth households are further adversely affected as they have little savings to rebuild wealth from and instead loose due to further declining labor income.
Subjects: 
energy prices
open economy model
heterogeneous agents
monetarypolicy
non-homothetic preferences
JEL: 
E52
F41
Q43
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6821-8
Document Type: 
Working Paper

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