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A theory of vintage capital investment and energy use

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  • Antonia Díaz

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  • Luis A. Puch

Abstract

In this paper we propose a theory of investment and energy use to study the response of macroeconomic aggregates to energy price shocks. In our theory this response depends on the interaction between the energy efficiency built in capital goods (which is irreversible throughout their lifetime) and the growth rate of Investment Specific Technological Change (ISTC hereafter). We show that ISTC is a sort of energysaving technical change and, therefore, a substitute of energy efficiency: it rises the productivity of capital without rising energy use, which increases effective energy efficiency (i.e., the amount of energy use required per unit of quality-adjusted capital). Hence, our theory can account for the fall of energy use per unit of output observed during the 1990s, a period in which energy prices fell below trend. By increasing investment in the years of high ISTC growth, the economy was increasing the average efficiency of the economy (the capital-energy ratio), shielding the economy against the impact of the 2003-08 price shock.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1320.

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Date of creation: Sep 2013
Date of revision: Apr 2014
Handle: RePEc:cte:werepe:we1320

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Keywords: Energy use; Vintage capital; Energy price shocks; Investment-specific technology shocks;

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  1. Luis A. Puch & Antonia Díaz & María D. Guilló, 2001. "Costly Capital Reallocation And Energy Use," Economics Working Papers we015215, Universidad Carlos III, Departamento de Economía.
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  7. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
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  24. Gilbert E. Metcalf, 2008. "An Empirical Analysis of Energy Intensity and Its Determinants at the State Level," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-26.
  25. Rodríguez-López, Jesús & Torres, José L., 2012. "Technological Sources Of Productivity Growth In Germany, Japan, And The United States," Macroeconomic Dynamics, Cambridge University Press, vol. 16(01), pages 133-150, February.
  26. David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, vol. 92(1), pages 160-180, March.
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