What is a Fossil Fuel Embargo Shock?

33 Pages Posted: 14 Feb 2023

See all articles by Marius Clemens

Marius Clemens

German Institute for Economic Research (DIW Berlin)

Werner Roeger

German Institute for Economic Research (DIW Berlin)

Abstract

In this paper, we focus on the impact of a occasionally binding quantity constraint on fossil fuel imports and compare the effects with those of an exogenous fossil fuel markup price shock. We show that while both shocks have similar responses to GDP and CPI inflation, they differ with respect to other macroeconomic components, such as consumption, exports, the trade balance and the functional income distribution.Our findings are relevant for policymakers when determining the most effective fiscal stabilization policy. We compare different temporary fiscal stabilization policies, such as energy tax reduction, transfer to liquidity-constrained households, and a valued-added tax cut. We find that fiscal policies are less effective in the case of an embargo shock. In particular a reduction of the energy tax is completely ineffective when there is an embargo. In contrast, in the event of a price markup shock, an energy tax reduction is effective because it counteracts the price increase and allows companies to respond according to their energy demands.In the case of an embargo, we show that transfer policies which redirect income to households receiving mostly labor income have good stabilization properties. However, this policy measure leads to a higher increase in all inflation rates which could widen the monetary policy trade-off between stabilizing output and inflation.

Keywords: Energy prices, embargo, general equilibrium model, Fiscal Policy

Suggested Citation

Clemens, Marius and Roeger, Werner, What is a Fossil Fuel Embargo Shock?. Available at SSRN: https://ssrn.com/abstract=4359122 or http://dx.doi.org/10.2139/ssrn.4359122

Marius Clemens (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Werner Roeger

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
25
Abstract Views
78
PlumX Metrics