Staff Report 230

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Models of Energy Use: Putty-Putty vs. Putty-Clay

Andrew Atkeson - Consultant
Patrick J. Kehoe

Published March 1, 1997

Energy use is inelastic in time-series data, but elastic in international cross-section data. Two models of energy use reproduce these elasticities: a putty-putty model with adjustment costs developed by Pindyck and Rotemberg (1983) and a putty-clay model. In the Pindyck-Rotemberg model, capital and energy are highly complementary in both the short run and the long run. In the putty-clay model, capital and energy are complementary in the short run, but substitutable in the long run. We highlight the differences in the cross-section implications of the models by considering the effect of an energy tax on output in both models. In the putty-putty model, an energy tax that doubles the price of energy leads to a fall in output in the long run of 33%. In contrast, the same tax in the putty-clay model leads to a fall in output of only 5.3%.

Published In: American Economic Review (Vol. 89, No. 4, September 1999, pp. 1028-43)

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