Reallocation, Productivity, and Monetary Policy in an Energy Crisis

49 Pages Posted: 1 May 2024

See all articles by Boris Chafwehé

Boris Chafwehé

Bank of England

Andrea Colciago

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); De Nederlandsche Bank - Research Department

Romanos Priftis

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2, 2024

Abstract

This paper proposes a New Keynesian multi-sector industry model incorporating firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We examine the impacts of a sustained fossil fuel price hike on sectoral size, labor productivity, and inflation. Final good sectors are ex-ante heterogeneous in terms of energy intensity in production. For this reason, a higher relative price of fossil resources affects their profitability asymmetrically. Further, it entails a substitution effect that leads to a greener mix of resources in the production of energy. As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs while promoting sectoral reallocation. While this entails a higher impact cost in terms of output and lower average productivity, it leads to a faster recovery in business dynamism in the medium-term.

Keywords: Energy, productivity, firm entry and exit, monetary policy.

JEL Classification: E62, L16, O33.

Suggested Citation

Chafwehé, Boris and Colciago, Andrea and Priftis, Romanos, Reallocation, Productivity, and Monetary Policy in an Energy Crisis (May 2, 2024). Available at SSRN: https://ssrn.com/abstract=4814193 or http://dx.doi.org/10.2139/ssrn.4814193

Boris Chafwehé

Bank of England ( email )

Andrea Colciago (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Romanos Priftis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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