Energy and the Macroeconomy: Capital Spending after an Energy Cost Shock

摘要

A two region, three period model of the process of capital-energy substitution in response to an energy price shock is constructed. The model predicts that statistical analyses done in cross-section will correctly estimate that energy and capital are substitutes, while those done in time series will incorrectly estimate that capital and energy are complements. The model uses a derivative putty-clay formulation to show how thermodynamic-efficiency-enhancing capital-for-energy substituting innovation will occur after an energy price shock in conjunction with a temporary decline in capital spending. The greater the aggregate increase in thermodynamic efficiency of the capital stock, the greater the predicted decline and duration of depressed capital spending. US evidence from the early 1800s to the present is reviewed, showing that the greatest improvements in thermodynamic efficiency of US vehicles started just before and occurred during US depressions, consistent with the model's prediction. (ERA citation 12:018364)