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Energy Price Increase and the Role of Monetary Policy and Financial Constraints: DSGE Approach

Mahmoudi, Mehran | 2023

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 56695 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Madanizadeh, Ali
  7. Abstract:
  8. In this study, we aim to investigate the effects of energy price shocks on macroeconomic variables, particularly inflation. To achieve this goal, we have designed a Dynamic Stochastic General Equilibrium (DSGE) model with nominal rigidities and financial frictions. In this model, households and firms are energy consumers, and the government is the sole supplier of energy, selling it to households, firms, and the external world without energy constraints. The energy price in this model differs between firms and households, and we analyze the almost persistent shocks to both of these prices. Within the framework of this model, we analyze the role of monetary policy in controlling the inflationary effects of energy price shocks, as well as the role of financial constraints on the impact of energy price shocks. The results indicate that monetary policy plays a significant role in controlling the inflationary effects of energy price shocks. For instance, in response to a 10% shock in firm real energy prices, inflation increases by 4% with an inadequate monetary policy response, while with an appropriate monetary policy response, inflation increases by approximately 1%. Furthermore, when the central bank assigns higher importance to closing the output gap and lower importance to controlling inflation, household welfare losses are maximized. The results of the model with financial constraints show that excessive investment by firms in capital allows the economy to better manage such energy shocks with lower welfare costs when they occur
  9. Keywords:
  10. Energy Subside ; Monetary Policy ; Financial Constraint ; Financial Friction ; Energy Price ; Iran Economy ; Dynamic Stochastic General Equilibrium ; Energy Price Impulse

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