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Asymmetric adaptations to energy price changes

  • Kuper, Gerard H.
  • Soest, D.P. van

    (Groningen University)

The effectiveness of policies to reduce the use of energy depend on the elasticity of substitution between the various inputs and on the rate of technological progress. This paper presents a theoretical model emphasising energy investments’ characteristics of uncertainty and irreversibility that result in testable hypotheses concerning the relative values of substitution parameters and rates of technological change in periods of high and increasing energy prices and in periods of low prices. Estimation results for a panel of sectors of the Dutch economy show that the elasticity of substitution between energy and other inputs is low in periods of low energy prices, whereas it is significantly higher in the preceding period of high and increasing energy prices. Furthermore, energy-saving technological progress in periods of high and increasing energy prices is also significantly higher than if energy prices are low and falling. The regression results suggest that, due this asymmetric response of firms to changes in energy prices, taxing energy in the current period of low energy prices will not yield substantial reductions in energy use of Dutch industry.

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File URL: http://irs.ub.rug.nl/ppn/183930525
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Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 99C21.

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Date of creation: 1999
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Handle: RePEc:dgr:rugsom:99c21
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  1. Ernst Berndt & Charles Kolstad & Jong-Kun Lee, 1993. "Measuring the Energy Efficiency and Productivity Impacts of Embodied Technical Change," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 33-56.
  2. Hamilton, James D, 1988. "A Neoclassical Model of Unemployment and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 593-617, June.
  3. Bacon, Robert W., 1991. "Rockets and feathers: the asymmetric speed of adjustment of UK retail gasoline prices to cost changes," Energy Economics, Elsevier, vol. 13(3), pages 211-218, July.
  4. Borenstein, Severin & Cameron, A Colin & Gilbert, Richard, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 305-39, February.
  5. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  6. Robert S. Pindyck, 1990. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
  7. Smyth, David J., 1993. "Energy prices and the aggregate production function," Energy Economics, Elsevier, vol. 15(2), pages 105-110, April.
  8. Chang, Kuo-Ping, 1994. "Capital-energy substitution and the multi-level CES production function," Energy Economics, Elsevier, vol. 16(1), pages 22-26, January.
  9. Javier F. Mory, 1993. "Oil Prices and Economic Activity: Is the Relationship Symmetric?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 151-162.
  10. David L. Ryan & Yu Wang & Andre Plourde, 1996. "Asymmetric Price Responses of Residential Energy Demand in Ontario," Canadian Journal of Economics, Canadian Economics Association, vol. 29(s1), pages 317-23, April.
  11. Peter Ferderer, J., 1996. "Oil price volatility and the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 1-26.
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