What drives industrial energy prices?

Maximo Camacho, Angela Caro and Daniel Peña

Economic Modelling, 2023, vol. 120, issue C

Abstract: Understanding whether the drivers of industrial energy prices are worldwide, group-specific or country-specific is a key issue in economics. This requires flexible econometric models to examine large data sets containing a significant variety of industrial sectors in different countries. To this end, we propose an extension of a dynamic factor model with group structure to account for observable country-specific explanatory variables and develop Monte Carlo simulations to show its good finite sample performance. Using data from 12 industrial sectors in 30 countries during the period from 1995 to 2015, we find three drivers of energy prices: (i) a common factor, the main driving force, captures the worldwide dynamics; (ii) country-specific variables, mainly related to inflation and the use of renewable and waste resources; and (iii) group-specific factors, which are more related to country affiliation than to sector classification.

Keywords: Energy prices; Dynamic factor model; Clustering; Penalized regression (search for similar items in EconPapers)
JEL-codes: C32 C33 C55 C82 E32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:120:y:2023:i:c:s0264999322003959

DOI: 10.1016/j.econmod.2022.106158

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