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Energy prices and household heterogeneity: Monetary policy in a Gas-TANK

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  • Chan, Jenny
  • Diz, Sebastian
  • Kanngiesser, Derrick

Abstract

How does household heterogeneity affect the transmission of an energy price shock? What are the implications for monetary policy? We develop a small, open-economy TANK model that features labor and an energy import good as complementary production inputs (Gas-TANK). Given such complementarities, higher energy prices reduce the labor share of total income. Due to borrowing constraints, this translates into a drop in aggregate demand. Higher price flexibility insures firm profits from energy price shocks, further depressing labor income and demand. We illustrate how the transmission of shocks in a RANK versus a TANK depends on the degree of complementarity between energy and labor in production and the extent of price rigidities. Optimal monetary policy is less contractionary in a TANK and can even be expansionary when credit constraints are severe. Finally, we show that the contractionary effect of energy price shocks on demand cannot be generalized to alternate supply shocks.

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  • Chan, Jenny & Diz, Sebastian & Kanngiesser, Derrick, 2024. "Energy prices and household heterogeneity: Monetary policy in a Gas-TANK," Journal of Monetary Economics, Elsevier, vol. 147(S).
    • Handle: RePEc:eee:moneco:v:147:y:2024:i:s:s0304393224000734
    DOI: 10.1016/j.jmoneco.2024.103620
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    3. Adolfsen, Jakob Feveile & Ferrari Minesso, Massimo & Mork, Jente Esther & Van Robays, Ine, 2024. "Gas price shocks and euro area inflation," Working Paper Series 2905, European Central Bank.
    4. Bobasu, Alina & Dobrew, Michael & Repele, Amalia, 2024. "Energy price shocks, monetary policy and inequality," Working Paper Series 2967, European Central Bank.
    5. Segarra, Ignacio & Atanasova, Christina & Figuerola-Ferretti, Isabel, 2024. "Electricity markets regulations: The financial impact of the global energy crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    6. Matzner, Anna & Steininger, Lea, 2024. "Firms’ heterogeneous (and unintended) investment response to carbon price increases," Working Paper Series 2958, European Central Bank.
    7. Wataru Miyamoto & Thuy Lan Nguyen & Dmitry Sergeyev, 2023. "How Oil Shocks Propagate: Evidence on the Monetary Policy Channel," Working Paper Series 2024-06, Federal Reserve Bank of San Francisco.
    8. Ricciutelli, Francesco, 2024. "Energy Inflation and Consumption Inequality," MPRA Paper 120899, University Library of Munich, Germany.
    9. Bobasu, Alina & Dobrew, Michael & Repele, Amalia, 2024. "Heterogeneous effects of monetary tightening in response to energy price shocks," Research Bulletin, European Central Bank, vol. 123.

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    More about this item

    Keywords

    Energy prices; Inflation; Household heterogeneity; Monetary policy;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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