How should governments respond to energy price crises? : a horse-race between fiscal policies

Duparc-Portier, Geoffroy and Figus, Gioele (2024) How should governments respond to energy price crises? : a horse-race between fiscal policies. Energy Economics, 130. 107284. ISSN 0140-9883 (https://doi.org/10.1016/j.eneco.2023.107284)

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Abstract

This paper compares the welfare and distributional implications of fiscal policies aimed at reducing a sudden and significant increase in the price of energy. A dynamic computable general equilibrium model with households disaggregated by income groups is used to compare the effectiveness of five energy price-reducing fiscal policies. The policies are assessed under two financing options, pure government debt and a mix of debt and windfall taxation on energy companies. Results from simulations demonstrate that targeted demand-side policies are more effective at reducing overall energy-driven inflation and increasing welfare. Supply-side policies and mixed demand and supply policies achieve a smaller reduction in the consumer price index but are more expansionary. Financing the policies partly through windfall taxation does not impact the ranking of policies but it delivers better distributional outcomes and higher welfare. The results motivate the use of windfall taxation if governments face high interest rates on debt financing and/ or if households care sufficiently about the provision of public goods. The optimal policy is likely a mix of supply-side measures such as production tax reductions or general price subsidies and either targeted energy price subsidies or targeted income subsidies financed where possible through windfall taxation.

  • Item type:Article
    ID code:87764
    Dates:
    Date
    Event
    29 February 2024
    Published
    15 January 2024
    Published Online
    29 December 2023
    Accepted
    19 July 2023
    Submitted
    Subjects:Social Sciences > Economic Theory
    Department:Strathclyde Business School > Economics
    Depositing user: Pure Administrator
    Date deposited:10 Jan 2024 12:11
    Last modified:17 Apr 2024 00:56
    URI:https://strathprints.strath.ac.uk/id/eprint/87764
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