An amplification mechanism in a model of energy

Abstract

This paper investigates a propagation mechanism of the energy price shock in a model where capital utilization is associated with costly energy consumption. Endogenous depreciation is an important element of the model, as it has been shown to produce a significant negative effect of energy prices on output. I show that the amplifying effect of endogenous depreciation is determined by the choice of the functional form and calibration strategy for the energy cost function. My estimates of the energy cost function allow to conclude that the energy price shock has only a moderate effect on output in this model, while endogenous depreciation mitigates rather than amplifies the effect of the energy price shock.

Energy in a Model of Firm Entry

“…In her model, energy impacts aggregate output through two different channels (i) energy enters the production function indirectly through capital utilization and (ii) energy affects the capital accumulation through variable depreciation. However, Kormilitsina (2016) shows that the amplification in Finn's model is due to specific calibration strategy and functional form used in modeling the energy sector. My model takes a similar approach by introducing firm entry as an extra channel of transmission along with production.…”