The role of income and substitution in commodity demand

Modelling OECD industrial energy demand: asymmetric price responses and energy-saving technical change

John Baffes, Alain Kabundi () and Peter Nagle

Oxford Economic Papers, 2022, vol. 74, issue 2, 498-522

Abstract: We estimate income elasticities of demand for three energy and six base metal commodities and their group aggregates. The elasticities, which vary with income levels, are estimated using a panel autoregressive distributed lag model covering the period 1965–2017, for up to 63 countries. We report three findings. First, most income elasticities are inversely proportional to income and decline rapidly as income rises. This implies commodity demand growth slows as economies develop, consistent with the dematerialization hypothesis. At median per capita income levels, the elasticity for metals (in aggregate) was 0.9, while that of energy was 0.7. Second, there is significant heterogeneity between commodities, both in terms of income elasticities and in terms of the performance of the model, with larger commodities and group aggregates performing better. Finally, we find evidence of substitution between commodities (e.g. oil/coal, aluminum/copper), estimated by the inclusion of the prices of similar commodities.

JEL-codes: E31 O31 Q02 Q13 Q18 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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