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Hicks in HANK: Fiscal Responses to an Energy Shock

Discussion Papers 2056, 50 S.

Christian Bayer, Alexander Kriwoluzky, Gernot J. Müller, Fabian Seyrich

2023

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Abstract

The distributional and disruptive effects of energy supply shocks are potentially large. We study the effectiveness of alternative fiscal responses in a two-country HANK model that we calibrate to the euro area. Energy subsidies can stabilize the domestic economy, but are fiscally costly and generate adverse spillovers to the rest of the monetary union: What the subsidizing country gains, the other countries lose. Transfers based on historical energy consumption in the form of a Hicks/Slutsky compensation are less effective domestically as subsidies but do not harm economic activity abroad. In addition, transfers increase welfare at Home while subsidies reduce welfare.

Fabian Seyrich

Ph.D. Student in the Macroeconomics Department

Alexander Kriwoluzky

Head of Department in the Macroeconomics Department



JEL-Classification: D31;E64;F45;Q41
Keywords: Energy crisis, subsidies, transfers, HANK2, monetary union, spillovers, heterogeneity, inequality, households

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