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Energy Price Increases and Macroeconomic Policy

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  • Robert S. Pindyck

Abstract

A rising world price of energy imposes a macroeconomic cost on the United States in two different ways. First, to the extent that energy is both an important input to production and a consumption good, with limited elasticities of substitution and demand, the economy's production and consumption possibilities are necessarily reduced as energy becomes more scarce. Thus, even if an expansionary monetary and fiscal policy were successful in pushing the economy close to its full capacity level, the resulting real national income would be lower than if energy prices had not increased and real GNP might be lower as well. An earlier version of this paper was presented at the CEPR Conference on Energy Prices, Inflation and Economic Activity, Cambridge, November 9, 1979. Work leading to this paper was supported by the Center for Energy Policy Research of the M.I.T. Energy Laboratory, and that support is gratefully acknowledged. In writing this paper, I benefited considerablyfrom conversations with and comments from Olivier Blanchard, Stanley Fischer, Benjamin Friedman, Robert Hall, Franco Modigliani, Robert Solow, and an anonymous referee.

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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 1 (1980)
Issue (Month): Number 4 ()
Pages: 1-20

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Handle: RePEc:aen:journl:1980v01-04-a01

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Cited by:
  1. Malik, Farooq & Nasereddin, Mahdi, 2006. "Forecasting output using oil prices: A cascaded artificial neural network approach," Journal of Economics and Business, Elsevier, vol. 58(2), pages 168-180.
  2. Greene, David L & Jones, Donald W & Leiby, Paul N, 1998. "The outlook for US oil dependence," Energy Policy, Elsevier, vol. 26(1), pages 55-69, January.
  3. Francesca Rondina, 2010. "The role of model uncertainty and learning in the U.S. postwar policy response to oil prices," UFAE and IAE Working Papers 834.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  5. Stanley Fischer, 1983. "Supply Shocks, Wage Stickiness, and Accommodation," NBER Working Papers 1119, National Bureau of Economic Research, Inc.
  6. Pindyck, Robert S., 1986. "Capital risk and models of investment behavior," Working papers 1819-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. W. F. Empey, 1981. "The Impact of Higher Energy Prices in Canada," Canadian Public Policy, University of Toronto Press, vol. 7(1), pages 28-35, Winter.

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