Date of This Version
9-9-2022
Abstract
Soaring energy prices since fall 2021 have prompted European governments to introduce policy measures to support households and businesses. In this paper, we employ the MATRIX model, a multi-sector and multi-agent macroeconomic model calibrated on the Euro Area, to analyze the economic and distributional effects of different types of macro-stabilization policies in response to energy price shocks. Simulation results show that, in the absence of stabilization policies, an increase in fossil fuel price would lead to a sharp growth in price inflation and a severe contraction in real GDP, followed by a slow but steady recovery. We find no significant effects of generalized tax cuts and household subsidies, while firm subsidies promote a faster recovery but at the expense of greater financial instability in the medium term due to the resulting market distortions. If timely adopted, government-funded energy tariff reduction is the most effective policy in mitigating GDP losses at relatively low public costs, especially if coupled with an extra-profit tax on energy firms. Energy entrepreneurs benefit from rising fuel prices in all policy scenarios, but to a lesser extent under energy tariff cuts and windfall profits tax, favouring, in that case, workers and downstream firms owners.
Recommended Citation
Turco, Enrico; Bazzana, Davide; Rizzati, Massimiliano; Ciola, Emauele; and Vergalli, Sergio, "Energy price shocks and stabilization policies in a multi-agent macroeconomic model for the Euro Area" (September 09, 2022). Fondazione Eni Enrico Mattei Working Papers. Paper 1377.
https://services.bepress.com/feem/paper1377