Inflation, inequality and financial vulnerability: Monetary vs. fiscal policy in the face of an energy shock

The energy shock caused by the conflict in Ukraine has exacerbated inflation, prompting central banks to respond by raising interest rates. This study uses an agent-based stock-flow consistent (AB-SFC) model to assess the impact of energy shocks, as well as monetary and fiscal policy, on inflation, inequality, and household financial vulnerability. The results show that energy shocks increase nominal spending for households and non-financial firms, leading to higher inflation, unemployment, inequality, household indebtedness and financial vulnerability. Furthermore, while monetary policy is effective in reducing inflation, it does so at the cost of exacerbating inequality and household financial vulnerability. In contrast, fiscal measures, such as energy price caps, can reduce inflation without exacerbating the economic crisis caused by the energy shock; indeed, compared to the monetary approach, fiscal policy reduces inflation and inequality and also improves household financial stability.