Macroeconomic effects of fiscal policy under an energy supply shock

Abstract

We study the macroeconomic effects of four fiscal policy responses to an energy supply shock: energy vouchers to all households, energy vouchers only to low-income households, energy vouchers to non-energy goods producers, and subsidies for investments in the energy sector. The analysis is carried out in a DSGE model that explicitly includes the energy sector. Calibrating the model to Swedish data, our results show that subsidies for investment in the energy sector are the most effective instrument to reduce energy prices in the short to medium term. However, this policy is welfare-dominated by energy vouchers given to households, as it immediately compensates low-income, non-saving households in the event of a shock. Providing energy vouchers to non-energy firms prevents energy prices from falling as quickly as they would without policy intervention and is also the least desirable from a welfare perspective.