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Asymmetric price responses and the underlying energy demand trend: Are they substitutes or complements? Evidence from modelling OECD aggregate energy demand

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  • Adeyemi, Olutomi I.
  • Broadstock, David C.
  • Chitnis, Mona
  • Hunt, Lester C.
  • Judge, Guy

Abstract

A number of energy demand studies have considered the importance of modelling Asymmetric Price Responses (APR), for example, the often-cited work of Gately and Huntington (2002). Griffin and Schulman (2005) questioned the asymmetric approach arguing that this is only capturing energy saving technical progress. Huntington (2006), however, showed that for whole economy aggregate energy and oil demand there is a role statistically for both APR and exogenous energy saving technical change. In a separate strand of the literature the idea of the Underlying Energy Demand Trend (UEDT) has been developed, see for example Hunt et al. (2003a and 2003b) and Dimitropoulos et al. (2005). They argue that it is important, in time series energy demand models, to allow for stochastic trends (or UEDTs) based upon the structural time series/dynamic regression methodology recommended by Harvey (1989, 1997). This paper attempts to bring these strands of the literature together by proposing a testing procedure for the UEDT and APR in energy demand models within both a panel context (consistent with the Huntington, 2006 approach) and the structural time series modelling framework. A set of tests across a range of specifications using time-series and panel data are therefore suggested in order to try and ascertain whether energy saving technical change (or the more general UEDT) and APR are substitutes for each other when modelling energy demand or whether they are actually picking up different influences and are therefore complements. Using annual whole economy data for 17 OECD countries over the period 1960-2006 the results suggest that for most of the countries the UEDT is preferred to APR, whereas for another group the UEDT and APR are complements, and for another group they are substitutes. It is argued therefore that energy demand modellers should not assume at the outset that one method is superior to the other. Moreover, wherever possible, a general model (be it in a time series or panel context) that includes a 'non linear UEDT' and APR should be initially estimated, and only if accepted by the data should symmetry and/or a more restrictive UEDT be imposed.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 32 (2010)
Issue (Month): 5 (September)
Pages: 1157-1164

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Handle: RePEc:eee:eneeco:v:32:y:2010:i:5:p:1157-1164

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Web page: http://www.elsevier.com/locate/eneco

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Keywords: Energy demand OECD Asymmetric price responses Underlying energy demand trend;

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References

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  1. Beenstock, M. & Willcocks, P., 1981. "Energy consumption and economic activity in industrialized countries : The dynamic aggregate time series relationship," Energy Economics, Elsevier, vol. 3(4), pages 225-232, October.
  2. Adeyemi, Olutomi I. & Hunt, Lester C., 2007. "Modelling OECD industrial energy demand: Asymmetric price responses and energy-saving technical change," Energy Economics, Elsevier, vol. 29(4), pages 693-709, July.
  3. Dargay, Joyce & Gately, Dermot, 1997. "The demand for transportation fuels: Imperfect price-reversibility?," Transportation Research Part B: Methodological, Elsevier, vol. 31(1), pages 71-82, February.
  4. Beenstock, Michael & Wilcocks, Patrick, 1983. "Energy and economic activity: a reply to Kouris," Energy Economics, Elsevier, vol. 5(3), pages 212-212, July.
  5. Dermot Gately & Hiliard G. Huntington, 2002. "The Asymmetric Effects of Changes in Price and Income on Energy and Oil Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 19-55.
  6. Dermot Gately, 1993. "The Imperfect Price-Reversibility of World Oil Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 163-182.
  7. John Dimitropoulos & Lester C. Hunt & Guy Judge, 2004. "Estimating Underlying Energy Demand Trends using UK Annual Data," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 108, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  8. Lester C. Hunt & Yasushi Ninomiya, 2003. "Unravelling Trends and Seasonality: A Structural Time Series Analysis of Transport Oil Demand in the UK and Japan," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 63-96.
  9. Dargay, Joyce & Gately, Dermot, 1995. "The imperfect price reversibility of non-transport oil demand in the OECD," Energy Economics, Elsevier, vol. 17(1), pages 59-71, January.
  10. Kouris, George, 1983. "Energy consumption and economic activity in industrialized economies--a note," Energy Economics, Elsevier, vol. 5(3), pages 207-212, July.
  11. Kouris, George, 1983. "Fuel consumption for road transport in the USA," Energy Economics, Elsevier, vol. 5(2), pages 89-99, April.
  12. Hunt, L.C. & Judge, G. & Ninomiya, Y., 2000. "Underlying Trends and Seasonality in UK Energy Demands: A Sectorial Analysis," Papers 134, Portsmouth University - Department of Economics.
  13. Francois Lescaroux & Olivier Rech, 2008. "The Impact of Automobile Diffusion on the Income Elasticity of Motor Fuel Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 41-60.
  14. Arqam Al-Rabbaie & Lester C. Hunt, 2006. "OECD Energy Demand: Modelling Underlying Energy Demand Trends using the Structural Time Series Model," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 114, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  15. Harvey, Andrew, 1997. "Trends, Cycles and Autoregressions," Economic Journal, Royal Economic Society, vol. 107(440), pages 192-201, January.
  16. Majid Ahmadian & Mona Chitnis & Lester C. Hunt, 2007. "Gasoline demand, pricing policy and social welfare in the Islamic Republic of Iran," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 31(2), pages 105-124, 06.
  17. Hillard G. Huntington, 2006. "A Note on Price Asymmetry as Induced Technical Change," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-8.
  18. James M. Griffin & Craig T. Schulman, 2005. "Price Asymmetry in Energy Demand Models: A Proxy for Energy-Saving Technical Change?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-22.
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Citations

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Cited by:
  1. A. Talha Yalta, 2013. "Small Sample Bootstrap Inference of Level Relationships in the Presence of Autocorrelated Errors: A Large Scale Simulation Study and an Application in Energy Demand," Working Papers 1301, TOBB University of Economics and Technology, Department of Economics.
  2. David C Broadstock & Lester C Hunt, 2013. "Tying up loose ends: A note on the impact of omitting MA residuals from panel energy demand models based on the Koyck lag transformation," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 140, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  3. Adofo, Yaw Osei & Evans, Joanne & Hunt, Lester Charles, 2013. "How sensitive to time period sampling is the asymmetric price response specification in energy demand modelling?," Energy Economics, Elsevier, vol. 40(C), pages 90-109.
  4. Olutomi I Adeyemi & Lester C. Hunt, 2013. "Accounting for asymmetric price responses and underlying energy demand trends in OECD industrial energy demand," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 142, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  5. Jens Boysen-Hogrefe, 2013. "Der Einfluss des Erdölpreises auf die Energiesteuerprognose," Kiel Working Papers 1849, Kiel Institute for the World Economy.
  6. Lester C. Hunt & David L Ryan, 2014. "Economic Modelling of Energy Services: Rectifying Misspecified Energy Demand Functions," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 147, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.

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