Governments can protect vulnerable households, keep businesses open, and preserve price signals without straining public finances, argue the writers.
By Pierre-Olivier Gourinchas, Borja Gracia, Delphine Prady, and Rodrigo Valdés
When global energy prices spike, governments face an unenviable dilemma: shield people and businesses while straining already reduced room in public budgets—or let prices rise for everyone and risk social and political backlash. So, how can policymakers do the best of both?
To be sure, there is no one-size-fits-all response because the impact of the war in the Middle East differs widely across countries, reflecting varied energy dependence, market structures, social protection policies, and fiscal space. Likewise, some countries are more affected than others by the high uncertainty about how long the shock will last and how much it will fuel inflation.
Sustained energy price surges can sharply reduce household purchasing power, which hurts poorer families most and strains businesses. If unaddressed, this can cause lasting damage by pushing more people into poverty and forcing businesses to shut down.
