Documents Toscani, Frederik G. 3 results

"This paper analyzes the implications of disruptions in Russian gas for Europe's balances and economic output. Alternative sources could replace up to 70 percent of Russian gas, allowing Europe to avoid shortages during a temporary disruption of around 6 months. However, a longer full shut-off of Russian gas to the whole of Europe would likely interact with infrastructure bottlenecks to produce very high prices and significant shortages in some countries, with parts of Central and Eastern Europe most vulnerable. With natural gas an important input in production, the capacity of the economy would shrink. Our findings suggest that in the short term, the most vulnerable countries in Central and Eastern Europe — Hungary, Slovak Republic and Czechia — face a risk of shortages of as much as 40 percent of gas consumption and of gross domestic product shrinking by up to 6 percent. The effects on Austria, Germany and Italy would also be significant, but would depend on the exact nature of remaining bottlenecks at the time of the shutoff and consequently the ability of the market to adjust. Many other countries are unlikely to face such constraints and the impact on GDP would be moderate—possibly under 1 percent. Immediate policy priorities center on actions to mitigate impacts, including to eliminate constraints to a more integrated gas market via easing infrastructure bottlenecks, to accelerate efforts in defining and agreeing solidarity contributions, and to promote stronger pricing pass through and other measures to generate greater energy savings. National responses and RePowerEU contains many important measures to help address these challenges, but immediate coordinated action is called for, with specific opportunities in each of these areas."

"We document the importance of import prices and domestic profits as a counterpart to the recent increase in euro area inflation. Through a novel consumption deflator decomposition, we show that import prices account for 40 percent of the average change in the consumption deflator over 2022Q1 – 2023Q1, while domestic profits account for 45 percent. The increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches. While the results show that firms have passed on more than the nominal cost shock, and have fared relatively better than workers, the limited available data does not point to a widespread increase in markups. Looking ahead, assuming nominal wage growth of around 4.5 percent over 2023-24 – slightly below the level seen in Q1 2023 – and broadly unchanged productivity, a normalization of the profit share to the average level over 2015-19 will be necessary to achieve a convergence of inflation to target over the next two years. Monetary policy will thus need to remain restrictive to anchor expectations and maintain subdued demand such that workers and firms settle on relative price setting that is consistent with disinflation."

"What is the effect of carbon pricing on inflation? This paper shows empirically that the consequences of the European Union's Emission Trading System (ETS) and national carbon taxation on inflation have been limited in the euro area, so far. This result is supported by analysis based on a panel local projections approach, as well as event studies based on individual countries. Our estimates suggest that carbon taxes raised the price of energy but had limited effects on overall consumer prices. Since future climate policy will need to be much more ambitious compared to what has been observed so far, including the need for larger increases in carbon prices, possible non-linearities might make extrapolating from historical results difficult. We thus also use input-output tables to simulate the mechanical effect of a carbon tax consistent with the EU's ‘Fit-for-55' commitments on inflation. The required increase of effective carbon prices from around 40 Euro per ton of CO2 in 2021 to around 150 Euro by 2030 could raise annual euro area inflation by between 0.2 and 0.4 percentage points. It is worth noting that the energy price increases caused by the rise in the effective carbon price to 150 Euro is substantially smaller than the energy price spike seen in 2022 following the invasion of Ukraine."