Energy price shocks, capacity utilization and business cycle fluctuations

This study focuses on the analysis of energy price shocks in the generation of business cycle phenomena. These shocks are transmitted through endogenous fluctuations in capital utilization. The production structure of the model gives rise to an empirical measure of true technology growth that is exempt from recent criticisms levelled at the standard measure, i.e., Solow residual growth. The model is calibrated and evaluated for the U.S. economy using annual data over the 19601988 period. At business cycle frequencies, the model accounts for 7491 percent of the volatility of U.S. output; closely matches the strong negative correlation between output and energy prices manifested in the U.S. data; and is generally consistent with other facts characterizing U.S. business cycles. Energy price shocks make a significant quantitative contribution to the models ability to explain the data.