Energy price shocks and stabilization policies in the MATRIX model

The recent surge in energy prices in Europe has prompted governments to introduce policy measures to support households and businesses. This paper uses the MATRIX model, a multi-sector and multi-agent macroeconomic model calibrated on the Euro Area, to analyse the economic and distributional effects of different macro-stabilization policies in response to energy price shocks. We find that, without policies, a surge in fossil fuel prices leads to higher inflation, lower GDP, and slow recovery. Generalized tax cuts and household subsidies have no significant effects, while firm subsidies promote a faster recovery at the expense of financial instability in the medium term, leading to a second slump. However, this second-round effect can be mitigated with proper fiscal-monetary policy coordination. If timely adopted, a government-funded energy tariff reduction is the most effective policy in mitigating GDP losses at relatively low public costs, particularly when coupled with an extra-profit tax on energy firms. Energy entrepreneurs benefit from rising fuel prices in all scenarios, but workers and downstream firms’ owners benefit more from energy tariff cuts and windfall profits tax.