The ECB Consumer Expectations Survey shows that in the euro area there is significant heterogeneity between the employed and the unemployed in the share of consumption devoted to energy-intensive goods. Starting from this evidence, this paper studies the optimal conduct of monetary policy in response to a marked increase in energy prices through the lens of a heterogeneous-agent model with frictions in the labour market, in which the share of energy-intensive consumption is higher for the unemployed.
When energy prices increase, the unemployed tend to reduce their consumption more than the employed; it follows that, in the face of energy shocks, an increase in the share of people without a job determines a marked worsening of aggregate welfare. Therefore, the optimal monetary policy must be partially accommodative towards inflation, so as to contain the rise in the unemployment rate.
