Working Paper 548

Putty-Clay Capital and Energy

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
Andrew Atkeson | Consultant

Published April 1, 1995

We evaluate the ability of models with putty-clay capital and stochastic energy prices to account for the dynamics of energy use and output. Economists have noted a close relationship between changes in the price of energy and changes in output. Moreover, they have documents that this relationship is asymmetric: energy price increases are associated with large output charges while energy prices decreases are associated with small output changes. Finally, following energy price changes, energy use adjusts slowly over time. Standard models with putty-putty capital fail to reproduce the features of the data. In our study of putty-clay models, we first develop a simple characterization of equilibrium. We apply these results to solve a prototype model. Preliminary results suggest that models with putty-clay capital improve on putty-putty models in accounting for the data.

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