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  • X920fw923?file=thumbnail
    Creator: Atkeson, Andrew and Kehoe, Patrick J.
    Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department)
    Number: 230
    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%.

    Subject (JEL): Q41 - Energy: Demand and Supply; Prices