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Hicks in HANK: Fiscal Responses to an Energy Shock

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  • Christian Bayer
  • Alexander Kriwoluzky
  • Gernot J. Müller
  • Fabian Seyrich

Abstract

The distributional and disruptive effects of energy supply shocks are potentially large. We study the effectiveness of alternative fiscal responses in a two-country HANK model that we calibrate to the euro area. Energy subsidies can stabilize the domestic economy, but are fiscally costly and generate adverse spillovers to the rest of the monetary union: What the subsidizing country gains, the other countries lose. Transfers based on historical energy consumption in the form of a Hicks/Slutsky compensation are less effective domestically as subsidies but do not harm economic activity abroad. In addition, transfers increase welfare at Home while subsidies reduce welfare.

Suggested Citation

  • Christian Bayer & Alexander Kriwoluzky & Gernot J. Müller & Fabian Seyrich, 2023. "Hicks in HANK: Fiscal Responses to an Energy Shock," Discussion Papers of DIW Berlin 2056, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2056
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    References listed on IDEAS

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    1. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2011. "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins," American Economic Review, American Economic Association, vol. 101(3), pages 471-475, May.
    2. Bachmann, Rüdiger & Born, Benjamin & Goldfayn-Frank, Olga & Kocharakov, Georgi & Luetticke, Ralph & Weber, Michael, 2021. "A Temporary VAT Cut as Unconventional Fiscal Policy," CEPR Discussion Papers 16690, C.E.P.R. Discussion Papers.
    3. Greg Kaplan & Giovanni L. Violante, 2014. "A Model of the Consumption Response to Fiscal Stimulus Payments," Econometrica, Econometric Society, vol. 82(4), pages 1199-1239, July.
    4. Christian Bayer & Ralph Luetticke & Lien Pham‐Dao & Volker Tjaden, 2019. "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk," Econometrica, Econometric Society, vol. 87(1), pages 255-290, January.
    5. Langot, François & Malmberg, Selma & Tripier, Fabien & Hairault, Jean-Olivier, 2023. "The Macroeconomic and Redistributive Effects of Shielding Consumers from Rising Energy Prices: the French Experiment," CEPREMAP Working Papers (Docweb) 2305, CEPREMAP.
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    Cited by:

    1. Chafwehé, Boris & Colciago, Andrea & Priftis, Romanos, 2024. "Reallocation, productivity, and monetary policy in an energy crisis," Bank of England working papers 1091, Bank of England.
    2. Colciago, Andrea & Priftis, Romanos & Chafwehé, Boris, 2024. "Reallocation, productivity, and monetary policy in an energy crisis," Working Paper Series 2961, European Central Bank.

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    More about this item

    Keywords

    Energy crisis; subsidies; transfers; HANK2; monetary union; spillovers; heterogeneity; inequality; households;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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