This paper studies the macroeconomic effects of energy price shocks in energy-importing economies using a heterogeneous-agent New Keynesian model. When MPCs are realistically large and the elasticity of substitution between energy and domestic goods is realistically low, increases in energy prices depress real incomes and cause a recession, even if the central bank does not tighten monetary policy. Imported energy inflation can spill over to wage inflation through a wage-price spiral, but this does not mitigate the decline in real wages. Monetary tightening has limited effect on imported inflation when done in isolation, but can be powerful when done in coordination with other energy importers by lowering world energy demand. Fiscal policy, especially energy price subsidies, can isolate individual energy importers from the shock, but it has large negative externalities on other economies.

Inventory investment accounts for a significant share of the business-cycle variation in GDP. I develop a tractable New Keynesian model with inventories to analytically explore their role in propagating demand fluctuations. Persistent increases in demand are amplified upstream, while transitory ones are smoothed out. The slope of the supply curve is increasing in the persistence of demand fluctuations, as markups respond more to more persistent shocks. And inventories amplify convexity in the supply curve, making larger positive demand shocks even more inflationary. In a quantitative model, I show that this demand channel of inventory investment amplifies the peak effect of monetary policy on GDP and inflation, but only when the shock is sufficiently persistent. Likewise inventories boost the peak GDP response to very persistent demand shocks, but dampen the response to transitory shocks. Finally, I show that the supply curve is more convex when shocks are more persistent, suggesting that the key to a nonlinear Phillips curve is that the demand shocks be both large and persistent.

In Belgium, nearly all employees’ wages are indexed to inflation. Firms are grouped into longstanding labor agreements that determine the exact timing and frequency at which wages are indexed, e.g. every year versus every month. Using firm-level administrative data, we leverage the resulting variation in real wages across firms to estimate the employment response. We find that employment contracts by 0.4% over four quarters for each 1% increase in wages. This result is robust to including NACE sector-date fixed effects and to using only variation in firms’ indexation timing, controlling for their chosen indexation frequency. About one-third of the response comes via anticipation of future wage increases. The elasticity is more than twice as large in magnitude in the post-pandemic period than before it, suggesting strong nonlinearities. Overall, these results show that, by preventing inflation from reducing real wages, inflation indexation reduces employment.