This box examines the mechanisms behind the aggregate and distributional effects of energy price shocks on euro area households, taking its cue from the recent surge in energy prices following the outbreak of the war in the Middle East. Drawing on a quantitative heterogeneous agent New Keynesian model calibrated to the euro area, it shows that energy price shocks reduce aggregate consumption through real income losses. This burden falls disproportionately on liquidity-constrained households, which spend a larger share of their household budget on energy and have fewer resources to absorb such price shocks.
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