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Models of energy use: putty-putty vs. putty-clay

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  • Andrew Atkeson
  • Patrick J. Kehoe

Abstract

Energy use is inelastic in time-series data, but elastic in international cross-section data. Two models of energy use reproduce these elasticities: a putty-putty model with adjustment costs developed by Pindyck and Rotemberg (1983) and a putty-clay model. In the Pindyck-Rotemberg model, capital and energy are highly complementary in both the short run and the long run. In the putty-clay model, capital and energy are complementary in the short run, but substitutable in the long run. We highlight the differences in the cross-section implications of the models by considering the effect of an energy tax on output in both models. In the putty-putty model, an energy tax that doubles the price of energy leads to a fall in output in the long run of 33%. In contrast, the same tax in the putty-clay model leads to a fall in output of only 5.3%.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 230.

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Date of creation: 1997
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Publication status: Published in American Economic Review (Vol. 89, No. 4, September 1999, pp. 1028-43)
Handle: RePEc:fip:fedmsr:230

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Keywords: Power resources;

References

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  1. Pindyck, Robert S, 1979. "Interfuel Substitution and the Industrial Demand for Energy: An International Comparison," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 169-79, May.
  2. Pindyck, Robert S & Rotemberg, Julio J, 1983. "Dynamic Factor Demands and the Effects of Energy Price Shocks," American Economic Review, American Economic Association, vol. 73(5), pages 1066-79, December.
  3. Struckmeyer, Charles S, 1987. "The Putty-Clay Perspective on the Capital-Energy Complementarity Debate," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 320-26, May.
  4. Cass, David & Stiglitz, Joseph E, 1969. "The Implications of Alternative Saving and Expectations Hypotheses for Choices of Technique and Patterns of Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 586-627, Part II, .
  5. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-77, November.
  6. Sakellaris, Plutarchos, 1997. "Irreversible Capital and the Stock Market Response to Shocks in Profitability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 351-79, May.
  7. Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-68, August.
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Cited by:
  1. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862 Elsevier.
  2. Parry, Ian & Darmstadter, Joel, 2003. "The Costs of U.S. Oil Dependency," Discussion Papers dp-03-59, Resources For the Future.
  3. Benjamin Bridgman, 2008. "Data files for "Energy Prices and the Expansion of World Trade"," Technical Appendices 06-199, Review of Economic Dynamics.
  4. Benjamin Bridgman, . "Energy Prices and the Expansion of World Trade," Departmental Working Papers 2003-14, Department of Economics, Louisiana State University.
  5. Felipe Meza & Erwan Quintin, 2005. "Financial crises and total factor productivity," Center for Latin America Working Papers 0105, Federal Reserve Bank of Dallas.

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