Not all energy shocks are alike. This column uses a multi-country, multi-sector DSGE model with production networks and trade linkages to compare a Europe-centric regional energy shock — akin to the 2022 Russian gas crisis — with a broader global energy shock like the current Strait of Hormuz disruption. The global shock worsens the EU’s terms of trade more severely and triggers exchange rate depreciation rather than the appreciation seen under a regional shock. Crucially, while the regional shock still allows firms and consumers to substitute towards cheaper foreign goods and inputs, the global shock closes off this escape route — amplifying both the GDP contraction and the indirect inflationary effects through global supply chains.Read More
