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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. • We study energy shock, inequality and financial vulnerability using an AB-SFC model. • Energy shock causes inflation, consumption, income and wealth inequality. • We assess the macroeconomic policy in the face of an inflation-induced energy shock. • Contractionary monetary policy amplifies the negative impact of the energy shock. • Energy price cap reduces inflation, inequality and household financial vulnerability.
Coccia et al. (Sat,) studied this question.