On the question posed to European panelists of whether putting a cap on consumer energy prices would be a more appropriate immediate response to increased inflation than raising interest rates, a majority of respondents said that they disagreed.
Among those who agreed, Olivier Blanchard of the Peterson Institute argued, “This is a case where a larger fiscal deficit can make the job of monetary policy easier.” But Jan Eeckhout, who said he was uncertain, objected: “Messing with the price system leads to disequilibrium, which someone has to pay anyway. Better monetary and fiscal policy plus redistribution.”
Of the panelists who disagreed, some focused on alternative ways to help poorer households. Jan Pieter Krahnen said, “Thou shall not manipulate market prices, because of adverse allocative consequences. Poorer households may be compensated directly.” Ernst Fehr of the University of Zurich suggested, “Instead of a cap on energy prices, poor households should receive a cash transfer to soften the burden of high energy prices.” Jean-Pierre Danthine of the Swiss Federal Institute of Technology of Lausanne argued, “I do not favor such a measure for ecological reasons. Direct subsidies to poorer households are preferable.”
Others were also concerned about the impact on incentives for reduced energy consumption. Franklin Allen replied, “Such a cap would blunt incentives to reduce usage of energy and so be counterproductive.” And Charles Wyplosz observed, “Energy prices should rise because supply is diminished (and good for the long run too). Inflation is another matter.”
Still others focused directly on inflation and potential policy responses. Lubos Pastor of Chicago Booth stated, “Inflation is broader based, going well beyond rising energy prices.” Patrick Honohan said, “The energy price shift is—and should be—unlikely to be temporary; [a] strongly negative nominal policy interest rate [is] hard to justify now.” Pol Antràs of Harvard commented, “Inflation is broad based. Price controls would reduce energy costs, but would likely foster spending, aggravating inflation. Need tightening.” And Ricardo Reis explained, “Monetary policy is the right tool to deal with inflation,” linking to one of his papers on the topic.
Finally, two experts referred back to history. Kjetil Storesletten observed, “We tried price caps as an instrument to curb inflation in the 1970s. It didn’t work then and it will not work now.” And Nicholas Bloom concurred: “Price controls don’t work—there is a long history of evidence on this. Indeed, not sure why this is even a question.”