Models of Energy Use: Putty-Putty vs. Putty-Clay - Staff Report 230 - Publications & Papers

Staff Report 230

Models of Energy Use: Putty-Putty vs. Putty-Clay
Patrick J. Kehoe - Monetary Advisor
Andrew Atkeson - Consultant .
March 1997

Abstract

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%.

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Staff Report 230

Abstract

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