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Fuel for economic growth?

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  • Gars, Johan
  • Olovsson, Conny

Abstract

Using data for 134 countries, we document that countries deriving a larger share of their energy from fossil fuel are richer and grow faster. We then set up an endogenous growth model where final output is produced with a non-energy and two substitutable energy intermediate goods: fossil fuel and biofuel. With non-energy and energy goods being gross complements, and with higher costs for improving the energy efficiency for biofuel than for fossil fuel, there exist two balanced growth paths: one with low growth where energy is derived from biofuel and one with high growth where energy is sourced from fossil fuel. Heterogeneity in initial technology levels can generate the Great Divergence. The demand for fossil fuel in technologically advanced countries drives up its price, thereby reducing demand for fossil fuel in less advanced countries that instead choose the more stagnant energy input.

Suggested Citation

  • Gars, Johan & Olovsson, Conny, 2019. "Fuel for economic growth?," Journal of Economic Theory, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:jetheo:v:184:y:2019:i:c:s002205311930095x
    DOI: 10.1016/j.jet.2019.104941
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    Cited by:

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    2. Conny Olovsson, 2019. "Oil prices in a general equilibrium model with precautionary demand for oil," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 1-17, April.
    3. Emmanuel Bovari & Victor Court, 2019. "Energy, knowledge, and demo-economic development in the long run: a unified growth model," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01698755, HAL.
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    5. Christopher Kennedy, 2021. "A biophysical model of the industrial revolution," Journal of Industrial Ecology, Yale University, vol. 25(3), pages 663-676, June.
    6. Olovsson, Conny, 2016. "Oil prices in a real-businesscycle model with precautionary demand for oil," Working Paper Series 332, Sveriges Riksbank (Central Bank of Sweden).

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    More about this item

    Keywords

    Growth; Malthusian stagnation; Industrial revolution; Great divergence; Technological progress; Energy;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General

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