Aggregation of Capital and Its Substitution with Energy

Gasper Garofalo and Devinder Malhotra

Eastern Economic Journal, 1988, vol. 14, issue 3, 251-262

Abstract: Controversy continues over the question of whether capital and energy are substitutes or complements. The authors find that the answer to the question partly depends on the aggregation of building capital and machinery capital into an aggregate input called capital. The authors' empirical results reject this aggregation. When building and machinery capital are treated as separate inputs, they find that machinery capital and energy are substitutes, while building capital and energy are complements. For policy purposes, this result implies that a rise in the price of energy will reduce building capital formation, while it will increase machinery capital formation.

Date: 1988
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