Fiscal and macroprudential policies during an energy crisis

Abstract

This paper analyzes how fiscal and macroprudential policies can jointly stabilize inflation, support output, and contain emissions after a surge in fossil fuel prices. In a New-Keynesian E-DSGE model with disaggregated energy sectors and banking frictions, we compare energy production subsidies, energy consumption subsidies, and carbon subsidies. While fiscal measures alone often raise carbon emissions, pairing them with sector-specific macroprudential tools – taxes on dirty-energy loans or subsidies on clean-energy loans – reallocates credit, strengthens macroeconomic stabilization, and curbs emissions volatility. Welfare analysis shows that combining production subsidies with “green” macroprudential support substantially reduces household welfare losses relative to fiscal measures alone. Our results show that carefully designed policy packages can cushion macroeconomic shocks without sacrificing climate objectives.