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Residential Natural Gas Demand Elasticities in OECD Countries: An ARDL Bounds Testing Approach

  • Bernstein, Ronald

    ()

    (E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behavior (FCN), RWTH Aachen University)

  • Madlener, Reinhard

    ()

    (E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behavior (FCN), RWTH Aachen University)

In this paper we analyze residential natural gas demand in twelve OECD countries using time series data from 1980 to 2008. We estimate long-run demand elasticities with regard to real disposable income and real residential price of natural gas using the autoregressive distributed lag (ARDL) bounds testing procedure (Pesaran and Shin, 1999). The robustness of the long-run estimates is checked by additionally considering the FMOLS and DOLS estimators. By employing an error correction framework we also obtain estimates for the speeds of adjustment to long-run equilibrium and short-run elasticities for the individual countries. The effect of weather conditions on natural gas demand in a given year is accounted for by including heating degree days as a control variable. On average, the long-run elasticities are 0.94 with regard to income, –0.51 with regard to price and 1.35 with regard to weather. The short-run dynamics assessed by estimation of the error correction models indicate an average adjustment coefficient of –0.58, a short-run income elasticity of 0.45, a short-run price elasticity of –0.24, and a short-run weather elasticity of 0.72. Hence, on average, the short-run elasticities are approximately half in magnitude compared to their long-run counterparts.

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Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 15/2011.

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Length: 23 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:ris:fcnwpa:2011_015
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  1. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  2. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
  3. Berkhout, Peter H. G. & Ferrer-i-Carbonell, Ada & Muskens, Jos C., 2004. "The ex post impact of an energy tax on household energy demand," Energy Economics, Elsevier, vol. 26(3), pages 297-317, May.
  4. Saikkonen, Pentti, 1992. "Estimation and Testing of Cointegrated Systems by an Autoregressive Approximation," Econometric Theory, Cambridge University Press, vol. 8(01), pages 1-27, March.
  5. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
  6. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  7. Frank Asche & Odd Bjarte Nilsen & Ragnar Tveteras, 2008. "Natural Gas Demand in the European Household Sector," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 27-46.
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