Energy Price Shocks and Stabilization Policies in a Multi-Agent Macroeconomic Model for the Euro Area

50 Pages Posted: 13 Sep 2022

See all articles by Enrico Maria Turco

Enrico Maria Turco

Catholic University of Milan; University of Amsterdam

Davide Bazzana

University of Brescia - Department of Economics and Management; Fondazione Eni Enrico Mattei (FEEM)

Massimiliano Rizzati

Fondazione Eni Enrico Mattei

Emanuele Ciola

Fondazione Eni Enrico Mattei (FEEM), Milan; University of Brescia - Department of Economics and Management

Sergio Vergalli

University of Brescia - Department of Economics; Fondazione Eni Enrico Mattei (FEEM), Milan

Date Written: September 09, 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.

Keywords: Energy shocks, Policy analysis, Agent-based models, Macroeconomic dynamics

JEL Classification: C63, E63, O13, Q43

Suggested Citation

Turco, Enrico Maria and Turco, Enrico Maria and Bazzana, Davide and Rizzati, Massimiliano and Ciola, Emanuele and Vergalli, Sergio, Energy Price Shocks and Stabilization Policies in a Multi-Agent Macroeconomic Model for the Euro Area (September 09, 2022). FEEM Working Paper No. 25, 2022, Available at SSRN: https://ssrn.com/abstract=4216599 or http://dx.doi.org/10.2139/ssrn.4216599

Enrico Maria Turco (Contact Author)

Catholic University of Milan ( email )

1 Largo A. Gemelli
Milano (Milan), MI Milano 20123
Italy

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Davide Bazzana

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

Massimiliano Rizzati

Fondazione Eni Enrico Mattei ( email )

Italy

Emanuele Ciola

Fondazione Eni Enrico Mattei (FEEM), Milan ( email )

Corso Magenta 63
20123 Milan
Italy

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

Sergio Vergalli

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Fondazione Eni Enrico Mattei (FEEM), Milan ( email )

Corso Magenta 63
20123 Milan
Italy

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