The price of energy and factor substitution in the US economy

Abstract

A fully estimated, medium-sized model of the US macroeconomy, based on the work of Bergstrom and Wyner, is used to analyse the ability of factor markets to absorb exogenously driven energy price shocks. Of interest is the relative importance of the different mechanisms by which energy use can respond to such shocks, in particular to substitution with other factor inputs. The results illustrate the flexibility of factor markets with both prices and volumes responding to disequilibrium in order to return the economy to its steady state long-run growth path. This steady state path is analysed in detail in this paper.