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Monetary and fiscal policy responses to fossil fuel price shocks

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  • Bartocci, Anna
  • Cantelmo, Alessandro
  • Cova, Pietro
  • Notarpietro, Alessandro
  • Pisani, Massimiliano

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 increase in lump-sum transfers to the poorest (“hand-to-mouth”) households, and raising the monetary policy rate in response to a temporary increase in the international price of fossil fuels. The central bank must 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 inflation target. Lump-sum transfers to hand-to-mouth households can stabilize their consumption with limited inflationary effects.

Suggested Citation

  • Bartocci, Anna & Cantelmo, Alessandro & Cova, Pietro & Notarpietro, Alessandro & Pisani, Massimiliano, 2024. "Monetary and fiscal policy responses to fossil fuel price shocks," Energy Economics, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324004456
    DOI: 10.1016/j.eneco.2024.107737
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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
    • 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; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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