Energy Transition and Monetary Policy: Distributional Effects on Household Income

As the world gradually shifts from petroleum to renewable energy, understanding how this transition affects households income is crucial. At the same time, the role of monetary policy — i.e., the management of interest rates to stabilize output and inflation — during major transitions like the energy shift remains unclear. Our research aims to explore this relationship, linking large-scale economic changes and economic policy to their impacts on household incomes in resource-rich countries like Norway. We will begin by examining how fluctuations in commodity markets, such as oil price changes, influence household incomes in resource rich economies. This analysis will help uncover strengths and vulnerabilities related to the energy dependence in the Norwegian economy. Analyzing such dynamics is complex, however, especially at the household level, where factors like family size, education, and employment play a role. To navigate this complexity, we will deploy and develop advanced econometric methods to trace how income patterns evolve over time, offering a detailed picture of the impact on different groups. Central to our project is understanding how monetary policy can stabilize the economy during this transition. By analyzing detailed financial data, we’ll investigate how monetary policy changes affect key economic indicators like exchange rates and inflation. Ultimately, we’ll assess how these policies shape household incomes at the micro level, and provide recommendations for the role of monetary policy in smoothing economic transitions.

As countries transition from petroleum to renewable energy sources, understanding the distributional effects is critical. Furthermore, the interplay between monetary policy and sectoral transformations is not well understood but could be crucial for formulating effective policies to smooth the impacts on households and firms during the transition. Our proposed approach integrates macroeconomic and monetary policy shocks with detailed microeconomic behaviour, to understand and navigate potential challenges in resource rich economies. We start by examining how shocks in commodity markets affect household incomes over time. This analysis will help us understand changes in the economy’s steady state due to commodity market shocks. This will be valuable information to be used when the economy is transitioning out of petroleum. Current empirical tools struggle with the high-dimensional nature of structural time-varying changes, making it challenging to estimate dynamic structural systems. By advancing functional time series analysis, we will explore how the entire distributions evolve over time, shedding light on the impacts of shocks on the distributions of household income depending on various characteristics. We will develop these tools further to analyze multivariate effects. The main part of the project relates to the role of monetary policy in the energy transition. In particular, we will assess the effects of monetary policy in dampening economic fluctuations and inequality, so as to give policy recommendations for resource rich economies transitioning out of oil. We start by specifying a structural monetary policy shock series using a high-frequency identification related to the financial market. We use these shocks to analyse the effect of monetary policy on aggregate macroeconomic and financial variables, such as investment, inflation and the exchange rate, before turning to the distributional effects for household income.