Dynamic models of the industrial demand for energy

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Abstract
Econometric approaches to modeling the demand for electricity, petroleum, coal, and natural gas by the manufacturing sector of the U.S. economy are investigated. Important aspects of the research are incorporation of dynamic effects as well as an introduction of the impact of technological change on energy usage. The first model analyzed is the ad hoc partial adjustment model applied to a system of equations. Extending the work of Rosen and Nadiri (A.E.R. 1969) and Berndt and Savin (Econometrica, Sept./Nov. 1975), the authors show that ad hoc models applied to flexible functional forms such as the translog or generalized Leontief have a number of undesirable features: (1) short-run own-price elasticities may exceed long-run elasticities, thus violating the Le Chatelier principle; and (2) for the translog, if the adjustment matrix is diagonal, all rates of adjustment must be equal; specification of a general adjustment matrix leads to underidentification of the adjustment parameters. The above two problems and others are illustrated using data drawn from U.S. aggregate manufacturing 1948 to 1971. A second model is developed from the cost-of-adjustment literature associated with R. Lucas and A. Treadway. It is shown that the Lucas and Treadway models can be implemented empirically to overcome themore » theoretical objections to the ad hoc partial adjustment models. In particular, the econometric model cannot violate the Le Chatelier principle and contains a generalized endogenous (non ad hoc) partial adjustment mechanism. An analysis of the effects of an investment tax credit on both the long-run demand for energy and the adjustment path to the new long-run equilibrium demand is made. Several models are considered that can be utilized in an analysis of endogenous technical change. The most promising model for future research is one which incorporates knowledge as a quasi-fixed factor within the cost of adjustment framework.« less

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