## Can Energy Subsidies Help Slay Inflation?

_IMF Working Papers, April 5, 2024_

## Source details

**Canonical URL:** [Can Energy Subsidies Help Slay Inflation?](https://www.imf.org/en/publications/wp/issues/2024/04/05/can-energy-subsidies-help-slay-inflation-547366)

## Other formats

- [Markdown version](/en/publications/wp/issues/2024/04/05/can-energy-subsidies-help-slay-inflation-547366/index.md)
- [Structured JSON version](/en/publications/wp/issues/2024/04/05/can-energy-subsidies-help-slay-inflation-547366/index.json)
- [Bundle manifest](/en/publications/wp/issues/2024/04/05/can-energy-subsidies-help-slay-inflation-547366/bundle-manifest.json)

## Bibliographic details
- Authors: Christopher J. Erceg, Marcin Kolasa, Jesper Lindé, Andrea Pescatori
- Published: April 5, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400273445.001

---

### Research scope and methodology
- Documents the transmission of oil supply shocks empirically in the United States and the Euro Area.
- Uses a New Keynesian modeling framework to study conditions under which energy subsidies can curb inflation.
- Considers both closed-economy and multi-country settings, including scenarios where a small group of countries jointly adopt subsidies.

### Key empirical and modeling findings
- A consumer energy subsidy may be counterproductive as an inflation-fighting tool when applied globally or in a segmented market, under empirically plausible conditions about wage-setting.
- There is more scope for energy subsidies to reduce core inflation and stimulate demand if introduced by a small group of countries which collectively do not have much influence on global energy prices.
- The conditions under which consumer energy subsidies reduce inflation are quite restrictive.
- Consumer energy subsidies can be counterproductive if the resulting increase in external debt is high enough to trigger sizeable exchange rate depreciation.
- Exchange rate depreciation risks are more likely in emerging markets with shallow foreign exchange markets.
- If the primary goal of fiscal measures responding to spikes in energy prices is to shield vulnerable households, targeted transfers are much more efficient: they achieve household protection at lower fiscal cost and transmit less to core inflation.

### Policy implications and recommendations
- Avoid broad consumer energy subsidies as a general anti-inflation tool unless specific wage-setting and external-financing conditions are satisfied.
- Consider collective action among small, low-influence energy-consuming countries only if their joint adoption does not affect global energy prices materially.
- Monitor external debt dynamics carefully when deploying consumer energy subsidies to avoid triggering exchange rate depreciation that would undermine inflation objectives.
- Prioritize targeted transfers to vulnerable households when the objective is social protection, because they are more fiscally efficient and have smaller effects on core inflation.

---

## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2024/english/wpiea2024081-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2024/english/wpiea2024081-print-pdf.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2024/04/05/can-energy-subsidies-help-slay-inflation-547366_