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Models of Energy Use: Putty-Putty Versus Putty-Clay

Models of Energy Use: Putty-Putty Versus Putty-Clay By ANDREW ATKESON Energy economists have identified two salient features of data on energy use and energy prices: In time-series data, energy use does not change much with energy price changes. (See Ernst R. Berndt and David O. Wood, 1975.) In cross-section data across countries, energy use is responsive to international differences in energy prices. (See James M. Griffin and Paul R. Gregory, 1976; Robert S. Pindyck, 1979.) In this article, we consider two models of energy use designed to reproduce the low short-run and high long-run elasticities of energy use seen in the data. We contrast the models’ implications for capital and output as well as energy use in the time series and in the cross section. One model we consider is a putty-putty model developed by Pindyck and Julio J. Rotemberg (1983). The key features of this model are that capital and energy are highly complementary and that capital is subject to adjustment costs. Because of the adjustment costs, the capital stock moves slowly over time in response to changes in energy prices. Since energy and capital are highly complementary in production, energy moves slowly as well. In the long run, the capital stock adjusts to http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Models of Energy Use: Putty-Putty Versus Putty-Clay

Atkeson, Andrew; Kehoe, Patrick J
American Economic Review , Volume 89 (4) – Sep 1, 1999
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References (25)

Publisher
American Economic Association
Copyright
Copyright © 1999 by the American Economic Association
Subject
Shorter Papers
ISSN
0002-8282
DOI
10.1257/aer.89.4.1028
Publisher site
See Article on Publisher Site

Abstract

By ANDREW ATKESON Energy economists have identified two salient features of data on energy use and energy prices: In time-series data, energy use does not change much with energy price changes. (See Ernst R. Berndt and David O. Wood, 1975.) In cross-section data across countries, energy use is responsive to international differences in energy prices. (See James M. Griffin and Paul R. Gregory, 1976; Robert S. Pindyck, 1979.) In this article, we consider two models of energy use designed to reproduce the low short-run and high long-run elasticities of energy use seen in the data. We contrast the models’ implications for capital and output as well as energy use in the time series and in the cross section. One model we consider is a putty-putty model developed by Pindyck and Julio J. Rotemberg (1983). The key features of this model are that capital and energy are highly complementary and that capital is subject to adjustment costs. Because of the adjustment costs, the capital stock moves slowly over time in response to changes in energy prices. Since energy and capital are highly complementary in production, energy moves slowly as well. In the long run, the capital stock adjusts to

Journal

American Economic Review – American Economic Association

Published: Sep 1, 1999

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