Energy Prices and Household Heterogeneity: Monetary Policy in a Gas-TANK

Chan, Jenny and Diz, Sebastian and Kanngiesser, Derrick (2022): Energy Prices and Household Heterogeneity: Monetary Policy in a Gas-TANK.

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 adverse 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 degree of price rigidities. Optimal monetary policy is less contractionary in a TANK and can even be expansionary when credit constraints are severe. Finally, the contractionary effect of an energy price shock on demand cannot be generalized to alternate supply shocks, as the specific nature of the supply shock affects how resources are redistributed in the economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Heterogenous agent models, business cycle fluctuations, energy, monetary policy
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

References

ACHARYA, S. AND K. DOGRA (2020): “Understanding HANK: Insights From a PRANK,” Econometrica, 88, 1113–1158. ADJEMIAN, S. AND M. DARRACQ PARIES (2008): “Optimal monetary policy and the transmission of oil-supply shocks to the euro area under rational expectations,” Working Paper Series 962, European Central Bank. BACHMANN, R., D. BAQAEE, C. BAYER, M. KUHN, A. L¨OSCHEL, B. MOLL, A. PEICHL, K. PITTEL, AND M. SCHULARICK (2022): “What if? The Economic Effects for Germany of a Stop of Energy Imports from Russia,” Tech. rep. BACKUS, D. AND M. CRUCINI (2000): “Oil prices and the terms of trade,” Journal of International Economics, 50, 185–213. BATTISTINI, N., V. DI NINO, M. DOSSCHE, AND A. KOLNDREKAJ (2022): “Energy prices and private consumption: what are the channels?” Economic Bulletin Articles, 3. BILBIIE, F. (2019): “Monetary Policy and Heterogeneity: An Analytical Framework,” Tech. rep. BILBIIE, F. AND X. RAGOT (2021): “Optimal Monetary Policy and Liquidity with Heterogeneous Households,” Review of Economic Dynamics, 41, 71–95. BILBIIE, F. O. (2008): “Limited asset markets participation, monetary policy and (inverted) aggregate demand logic,” Journal of Economic Theory, 140, 162–196. ——— (2020): “The New Keynesian cross,” Journal of Monetary Economics, 114, 90–108. BILBIIE, F. O., D. R. K¨ANZIG, AND P. SURICO (2022): “Capital and income inequality: An aggregatedemand complementarity,” Journal of Monetary Economics, 126, 154–169. BLANCHARD, O. AND J. GALI (2007): “The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?” Tech. Rep. w13368, National Bureau of Economic Research, Cambridge, MA. BODENSTEIN, M., C. J. ERCEG, AND L. GUERRIERI (2008): “Optimal monetary policy with distinct core and headline inflation rates,” Journal of Monetary Economics, 55, S18–S33. BODENSTEIN, M., L. GUERRIERI, AND L. KILIAN (2012): “Monetary Policy Responses to Oil Price Fluctuations,” IMF Economic Review, 60, 470–504. BROER, T., N.-J. HARBO HANSEN, P. KRUSELL, AND E. ¨OBERG (2020): “The New Keynesian Transmission Mechanism: A Heterogeneous-Agent Perspective,” The Review of Economic Studies, 87, 77–101. BRUNO, M. AND J. D. SACHS (1985): Economics of Worldwide Stagflation, National Bureau of Economic Research, Inc. CABALLERO, R. J. AND A. SIMSEK (2022): “A Note on Temporary Supply Shocks with Aggregate Demand Inertia,” NBER Working Papers 29815, National Bureau of Economic Research, Inc. CANTORE, C. AND L. B. FREUND (2021): “Workers, capitalists, and the government: fiscal policy and income (re)distribution,” Journal of Monetary Economics, 119, 58–74. CELASUN, O., A. MINESHIMA, N. ARREGUI, V. MYLONAS, A. ARI, I. TEODORU, S. BLACK, K. ZHUNUSSOVA, D. IAKOVA, AND I. PARRY (2022): “Surging Energy Prices in Europe in the Aftermath of the War: How to Support the Vulnerable and Speed up the Transition Away from Fossil Fuels,” IMF Working Papers, 2022, 1. CESA-BIANCHI, A. AND A. FERRERO (2021): “The transmission of Keynesian supply shocks,” Bank of England working papers 934, Bank of England. CORSETTI, G., L. DEDOLA, AND S. LEDUC (2008): “International Risk Sharing and the Transmission of Productivity Shocks,” Review of Economic Studies, 75, 443–473. DEBORTOLI, D. AND J. GAL´I (2017): “Monetary policy with heterogeneous agents: Insights from TANK models,” EconomicsWorking Papers 1686, Department of Economics and Business, Universitat Pompeu Fabra. FURLANETTO, F. AND M. SENECA (2012): “Rule-of-Thumb Consumers, Productivity, and Hours*,” The Scandinavian Journal of Economics, 114, 658–679. GAL´I, J., J. D. L´OPEZ-SALIDO, AND J. VALL´E S (2007): “Understanding the Effects of Government Spending on Consumption,” Journal of the European Economic Association, 5, 227–270. GUERRIERI, V., G. LORENZONI, L. STRAUB, AND I. WERNING (2022a): “Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?” American Economic Review, 112, 1437–74. ——— (2022b): “Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?” American Economic Review, 112, 1437–74. HAMILTON, J. D. (2008): “Oil and the Macroeconomy,” The New Palgrave Dictionary of Economics, 2. ——— (2009): “Causes and Consequences of the Oil Shock of 2007-08,” Brookings Papers on Economic Activity, 40, 215–283. HOBIJN, B. AND D. LAGAKOS (2005): “Inflation Inequality in the United States,” Review of Income and Wealth, 51, 581–606. KAPLAN, G. AND G. L. VIOLANTE (2018): “Microeconomic Heterogeneity and Macroeconomic Shocks,” Journal of Economic Perspectives, 32, 167–194. KILIAN, L. (2008): “The Economic Effects of Energy Price Shocks,” Journal of Economic Literature, 46, 871–909. K¨A NZIG, D. R. (2021): “The Unequal Economic Consequences of Carbon Pricing,” Tech. rep. LEE, K. AND S. NI (2002): “On the dynamic effects of oil price shocks: a study using industry level data,” Journal of Monetary Economics, 49, 823–852. MONTORO, C. (2012): “Oil Shocks and Optimal Monetary Policy,” Macroeconomic Dynamics, 16, 240–277. NATAL, J. (2012): “Monetary Policy Response to Oil Price Shocks,” Journal of Money, Credit and Banking, 44, 53–101. PIERONI, V. (2022): “Energy Shortages and Aggregate Demand: Output Loss and Unequal Burden from HANK,” Tech. rep. PLANTE, M. (2014): “How should monetary policy respond to changes in the relative price of oil? Considering supply and demand shocks,” Journal of Economic Dynamics and Control, 44, 1–19. RAVN, M. O. AND V. STERK (2021): “Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach,” Journal of the European Economic Association, 19, 1162–1202. STEVENS, A. (2015): “Optimal monetary policy response to endogenous oil price fluctuations,”Working Paper Research 277, National Bank of Belgium.