Michael Dobrew
- 23 October 2024
- RESEARCH BULLETIN - No. 123Details
- Abstract
- This article analyses 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 Heterogeneous Agent New Keynesian (HANK) model that matches salient features of the euro area data. The 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 labour income as well as negative direct price effects. Active policy responses raising rates in response to inflation amplify aggregate outcomes through a reduction in aggregate demand, but speed up the recovery by enabling households to rebuild wealth through higher returns on savings. However, low-wealth households are also adversely affected by having less savings from which to rebuild wealth and instead lose out due to further declining labour income.
- JEL Code
- 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
- 2 August 2024
- WORKING PAPER SERIES - No. 2967Details
- 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.
- JEL Code
- 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
- 1 February 2024
- OCCASIONAL PAPER SERIES - No. 337Details
- Abstract
- In the low inflation and low interest rate environment that prevailed over the period 2013-2020, many argued that besides expansionary monetary policy, expansionary fiscal policy could also support central banks’ efforts to bring inflation closer to target. During the pandemic, proper alignment of fiscal and monetary policy was again crucial in promoting a rapid macroeconomic recovery. Since the end of 2021 an environment of higher inflation, lower growth, higher uncertainty, and higher interest rates has changed the nature of the required policy mix and poses different challenges to the interaction between monetary and fiscal policy. Following up on the work done under the ECB’s 2020 strategy review (see Debrun et al., 2021), this report explores some of the renewed challenges to monetary and fiscal policy interactions in an environment of high inflation. The main general conclusion is that, with an independent monetary policy that aims to bring inflation back to target in a timely manner, it is still possible to design fiscal policy in a way that protects vulnerable parts of society against the costs of high inflation without pulling against the central bank’s effort to tame inflation. This is more likely to be the case if fiscal measures are temporary and targeted, and if priority is given to structural reforms and public investment in support of potential growth. The latter is particularly effective in reshaping the supply side of the economy in a manner that is likely to have a lasting positive structural impact.
- JEL Code
- E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
- 21 September 2021
- OCCASIONAL PAPER SERIES - No. 269Details
- Abstract
- The ECB’s price stability mandate has been defined by the Treaty. But the Treaty has not spelled out what price stability precisely means. To make the mandate operational, the Governing Council has provided a quantitative definition in 1998 and a clarification in 2003. The landscape has changed notably compared to the time the strategy review was originally designed. At the time, the main concern of the Governing Council was to anchor inflation at low levels in face of the inflationary history of the previous decades. Over the last decade economic conditions have changed dramatically: the persistent low-inflation environment has created the concrete risk of de-anchoring of longer-term inflation expectations. Addressing low inflation is different from addressing high inflation. The ability of the ECB (and central banks globally) to provide the necessary accommodation to maintain price stability has been tested by the lower bound on nominal interest rates in the context of the secular decline in the equilibrium real interest rate. Against this backdrop, this report analyses: the ECB’s performance as measured against its formulation of price stability; whether it is possible to identify a preferred level of steady-state inflation on the basis of optimality considerations; advantages and disadvantages of formulating the objective in terms of a focal point or a range, or having both; whether the medium-term orientation of the ECB’s policy can serve as a mechanism to cater for other considerations; how to strengthen, in the presence of the lower bound, the ECB’s leverage on private-sector expectations for inflation and the ECB’s future policy actions so that expectations can act as ‘automatic stabilisers’ and work alongside the central bank.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies