The impact of permanent energy price shocks on the UK economy

This paper analyses the implications of permanent energy price shocks for the UK economy. To analyse the impact of such shocks, the paper builds a dynamic general equilibrium model. This approach allows the researchers to articulate theoretically the wide variety of channels through which energy pri...

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Bibliographic Details
Published in:Bank of England. Quarterly Bulletin 2011-07, Vol.51 (3), p.254
Main Authors: Harrison, Richard, Thomas, Ryland, de Weymarn, Iain
Format: Article
Language:English
Subjects:
Capital stock
Consumption
Demand
Economic impact
Economic models
Energy economics
Energy prices
Foreign exchange rates
Impact analysis
Inflation
Monetary policy
Natural gas
Self sufficiency
Studies
Supply
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Summary:This paper analyses the implications of permanent energy price shocks for the UK economy. To analyse the impact of such shocks, the paper builds a dynamic general equilibrium model. This approach allows the researchers to articulate theoretically the wide variety of channels through which energy prices might affect demand and supply by making a careful analysis of how shocks propagate through the economy, a process that inevitably takes time. The paper examines how the various channels in the model contribute to the overall response to a permanent energy price shock. The paper shows that the impact of higher energy prices depends significantly on the monetary policy response to higher energy prices, both here and abroad. When policy does not fully accommodate the shock the degree of nominal wage rigidity is important in determining the extent to which the indirect effects of higher energy prices are able to offset the direct effects of higher petrol and utility prices on inflation.
ISSN:0005-5166
2399-4568