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Why Do Energy Prices Matter? The Role Of Interindustry Linkages In U.S. Manufacturing

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  • JOSHUA LINN

Abstract

"There is considerable empirical evidence that energy prices had a large effect on the U.S. economy between World War II and the 1980s. This paper argues that linkages between manufacturing industries amplify the effect of an energy price shock and help explain the large effect. In particular, energy-intensive industries are important input suppliers to other industries. When the price of energy increases, energy-intensive industries contract, raising materials prices for other industries. Because of the reduction in materials supply, the downstream industries also contract, which I refer to as the supply effect. Using data from the Census of Manufactures, I find that the supply effect accounted for about one half of the sensitivity of value added to the price of energy. I use plant-level census data to show that the supply effect caused similar changes in value added per plant as in value added per industry. A price increase caused a small, although statistically significant, decrease in entry and had no effect on exit. Finally, the supply effect reduced plant-level labor demand". ("JEL "E32, Q43) Copyright (c) 2008 Western Economic Association International.

Suggested Citation

  • Joshua Linn, 2009. "Why Do Energy Prices Matter? The Role Of Interindustry Linkages In U.S. Manufacturing," Economic Inquiry, Western Economic Association International, vol. 47(3), pages 549-567, July.
  • Handle: RePEc:bla:ecinqu:v:47:y:2009:i:3:p:549-567
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    References listed on IDEAS

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    1. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
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    Cited by:

    1. Narayan, Paresh Kumar & Narayan, Seema & Smyth, Russell, 2008. "Are oil shocks permanent or temporary? Panel data evidence from crude oil and NGL production in 60 countries," Energy Economics, Elsevier, vol. 30(3), pages 919-936, May.
    2. Matthew E. Kahn & Erin T. Mansur, 2010. "How Do Energy Prices, and Labor and Environmental Regulations Affect Local Manufacturing Employment Dynamics? A Regression Discontinuity Approach," NBER Working Papers 16538, National Bureau of Economic Research, Inc.
    3. repec:eee:energy:v:130:y:2017:i:c:p:204-217 is not listed on IDEAS
    4. Kahn, Matthew E. & Mansur, Erin T., 2013. "Do local energy prices and regulation affect the geographic concentration of employment?," Journal of Public Economics, Elsevier, vol. 101(C), pages 105-114.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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