A DSGE model of energy efficiency with vintage capital in Chinese industry

Abstract

As the conventional method for estimating the impact of energy prices on energy consumption, the reduced form approach creates a “black box” interpretation of the energy price-intensity relationship without identifying the channels, or their magnitudes, through which prices matter. This shortcoming is particularly serious for China that has multiple ownership types operating under different government policy regimes. To remedy this shortcoming, this paper formulates a dynamic stochastic general equilibrium (DSGE) model that incorporates a range of technology avenues – both embodied and disembodied – for achieving energy-savings in response to rising energy prices. Employing Chinese firm-level data, the paper recovers key parameters in the DSGE model by indirect inference; so the model can replicate the stylized facts based on the firm-level data. A key finding is that embodied putty-clay investment is a critical channel for achieving energy efficiency, on which SOEs most depend, non-state-owned enterprises depend less, and foreign-funded enterprises least depend.