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

  • JOSHUA LINN

"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.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 47 (2009)
Issue (Month): 3 (07)
Pages: 549-567

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Handle: RePEc:bla:ecinqu:v:47:y:2009:i:3:p:549-567
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