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MACROECONOMIC EFFECTS OF ENERGY PRICE SHOCKS ON THE BUSINESS CYCLE

Published online by Cambridge University Press:  06 July 2015

Bao Tan Huynh
Bao Tan Huynh*
Affiliation:
School of Economics, Singapore Management University
*
Address correspondence to: Bao Tan Huynh, School of Economics, Singapore Management University, 90 Stamford Road, Singapore178903; e-mail: [email protected].
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Abstract

This paper proposes a framework of endogenous energy production with convex costs to investigate the general equilibrium effects of energy price shocks on the business cycle. This framework explicitly models the consumption of durables and nondurables and implements a high complementarity between energy and the usage of durables and capital. The model predicts energy price elasticities of various consumption variables that fall within reasonable agreement with empirical estimates. Convex costs in energy production produce energy price and energy supply dynamics that tallies well with empirical behavior. Our analysis confirms in a theoretical setting recent observations that not all energy price shocks are the same. They can be distinct in terms of energy price dynamics and impact on the business cycle, as well as energy price elasticities of various macro variables that can be useful indicators for their underlying causes.

Keywords

EnergyEnergy Price ShockBusiness Cycle
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 3 , April 2016 , pp. 623 - 642
Copyright
Copyright © Cambridge University Press 2015 

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