Economic Growth, Energy Prices and Technological Innovation

Abstract

Energy economists are repeatedly asked to analyze the short run and long run macroeconomic effects of energy price shocks. The authors examine the effect of energy prices in a dynamic model of economic growth as a function of capital, labor, energy prices, and technological innovation. Their approach extends earlier studies in two ways. First, they depart from the standard approach of modeling strictly in either levels or differences by using an error correction model. The advantage of this approach is that both short run and long run information is used in the model. Second, they construct a measure of technological innovation with patent filings. Typically, deterministic trends have been used to capture technological growth. The increase in energy efficiency since 1974 had been due to energy conservation and improvements in energy intensive capital stock and production processes. They authors try to simultaneously use energy prices and technological innovation in a model of macroeconomic growth. If energy price symmetry is imposed, they conclude that the short run energy price effects are approximately half the long run energy price effects. When the restriction is relaxed short run price symmetry does not hold. In particular, short run price increases are associated with economicmore » downturns while short run price declines have no significant impact on economic activity. Also, the results show that technological innovation, measured through the stock of patents, contributes both directly to economic growth and indirectly through improvements in the economy`s capital stock.« less