Jenny Chan, Sebastian Diz and Derrick Kanngiesser
In recent years, increases in global energy prices have posed significant challenges for net energy importers such as the UK or the euro area. In addition to the inflationary impact, increases in the relative price of energy imply a decline in real incomes for the energy importers. In this blog post, we introduce a macroeconomic model that captures the direct adverse effects on aggregate demand caused by energy price shocks (a notion that resonates with policymakers’ concerns, ie Schnabel (2022), Broadbent (2022), Tenreyro (2022), Lane (2022)). We show how the transmission of energy price shocks differs from other supply shocks, thereby contributing to a better understanding and more effective mitigation of the disruptions caused by energy price shocks.
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