A Heterogeneous Agent Model of Energy Consumption and Energy Conservation

Audzei and Sutóris ask whether inflation-targeting monetary policy affects households’ incentives to invest in energy conservation, and whether the standard central bank response to energy price shocks is welfare-optimal when agents are heterogeneous. They embed energy in both the consumption bundle and the production function of a tractable heterogeneous-agent New Keynesian (HANK) model that features Challe–Ravn–Sterk search-and-matching frictions in the labor market, nominal bond holdings, and — the paper’s central innovation — household-level energy conservation (abatement) capital that converts raw energy into energy services. The model is calibrated to the Czech Republic, with an energy share in household consumption of 10%, an energy share in production of 5%, a steady-state job-finding rate of 0.15 (targeting a poor hand-to-mouth share of 9%), and a capitalist share of 12%. The main quantitative findings are that a tighter monetary policy shock reduces abatement capital investment, increases the energy intensity of consumption, and depresses the job-finding rate, all of which fall disproportionately on lower-wealth households; conversely, a weaker policy response to a persistent energy price shock — one with a lower inflation coefficient (φ_π = 1.1 rather than the baseline φ_π = 2) — generates welfare gains for all agent groups (capitalists, employed workers, newly unemployed, long-term unemployed) despite higher measured inflation, because it preserves employment and stimulates abatement investment, reducing households’ long-run exposure to energy price shocks. The paper also shows that a “looking-through” policy (reacting to core rather than CPI inflation) does not deliver welfare benefits because it is too accommodative when energy prices rise but too restrictive once they start to fall; Ramsey-optimal policy instead features a sharp front-loaded rate spike followed by a rapid decline, minimizing aggregate consumption volatility through higher abatement capital.

Ivan Sutóris | Macro Paper Warehouse

A Heterogeneous Agent Model of Energy Consumption and Energy Conservation