Wildauer, R. orcid.org/0000-0001-6395-6286, Kohler, K., Aboobaker, A. et al. (1 more author) (2023) Energy price shocks, conflict inflation, and income distribution in a three-sector model. Energy Economics, 127 (Part B). 106982. ISSN 0140-9883
Abstract
The paper presents a model of conflict inflation to investigate the distributional effects of energy price shocks. We argue that periods of high inflation are always periods of significant redistribution of income. We analyse how such redistribution occurs along two dimensions: between workers and firms and between sectors of the economy. To study the distributional outcomes of the recent inflationary episode, we build a three-sector model comprising a domestic energy sector which provides inputs for a goods and a services sector. The model is calibrated to US sectoral data with the Method of Simulated Moments. While energy prices are set internationally, non-energy prices and nominal wages are set by firms and workers, giving rise to conflicting claims over the distribution of income. We consider three shocks that trigger inflationary distributional conflict: an energy price shock combined with demand and supply shocks to the goods sector. We find that the recent inflationary episode constitutes a price-wage rather than a wage-price spiral. The combined shocks induce non-energy firms to raise prices, which undermines real wages, and redistributes income towards firms. The sectoral demand shift towards goods in combination with pandemic-related supply bottlenecks further raises mark-ups, accelerating inflation and leading to divergence in sectoral profit margins. We compare three anti-inflationary policies: redistributing windfall profits to workers, nominal wage restraint, and aggregate demand contraction through monetary or fiscal policy. The redistribution of profits via a windfall tax is most effective in reducing inflation without reinforcing reductions in employment and labour shares.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2023 The Author(s). This is an open access article under the terms of the Creative Commons Attribution License (CC-BY 4.0), which permits unrestricted use, distribution and reproduction in any medium, provided the original work is properly cited. |
Keywords: | Energy price shocks; Inflation; Income distribution; Multi-sector model; Wage-price spiral; Price-wage spiral |
Dates: |
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Institution: | The University of Leeds |
Academic Units: | The University of Leeds > Faculty of Business (Leeds) > Economics Division (LUBS) (Leeds) |
Depositing User: | Symplectic Publications |
Date Deposited: | 08 Sep 2023 13:30 |
Last Modified: | 18 Oct 2024 14:45 |
Status: | Published |
Publisher: | Elsevier |
Identification Number: | 10.1016/j.eneco.2023.106982 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:203174 |