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Inflation, inequality and financial vulnerability: Monetary vs. fiscal policy in the face of an energy shock

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  • Coccia, Samantha
  • Russo, Alberto

Abstract

The energy shock caused by the conflict in Ukraine has exacerbated inflation, prompting central banks to respond by raising interest rates. This study uses an agent-based stock-flow consistent (AB-SFC) model to assess the impact of energy shocks, as well as monetary and fiscal policy, on inflation, inequality, and household financial vulnerability. The results show that energy shocks increase nominal spending for households and non-financial firms, leading to higher inflation, unemployment, inequality, household indebtedness and financial vulnerability. Furthermore, while monetary policy is effective in reducing inflation, it does so at the cost of exacerbating inequality and household financial vulnerability. In contrast, fiscal measures, such as energy price caps, can reduce inflation without exacerbating the economic crisis caused by the energy shock; indeed, compared to the monetary approach, fiscal policy reduces inflation and inequality and also improves household financial stability.

Suggested Citation

  • Coccia, Samantha & Russo, Alberto, 2025. "Inflation, inequality and financial vulnerability: Monetary vs. fiscal policy in the face of an energy shock," Energy Economics, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:eneeco:v:143:y:2025:i:c:s0140988325000453
    DOI: 10.1016/j.eneco.2025.108222
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    Keywords

    Energy shock; Monetary policy; Fiscal policy; Inequality; Agent-based model;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • 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
    • 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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