A Theory of Vintage Capital Investment and Energy Use

Antonia Díaz and Luis Puch

No 2013-35, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: In this paper we propose a theory of investment and energy use to study the response of macroeconomic aggregates to energy price shocks. In our theory this response depends on the interaction between the energy efficiency built in capital goods (which is irreversible throughout their lifetime) and the growth rate of Investment Specific Technological Change (ISTC hereafter). We show that ISTC is a sort of energy-saving technical change and, therefore, a substitute of energy eficiency: it rises the productivity of capital without rising energy use, which increases effective energy eficiency (i.e., the amount of energy use required per unit of quality-adjusted capital). Hence, our theory can account for the fall of energy use per unit of output observed during the 1990s, a period in which energy prices fell below trend. By increasing investment in the years of high ISTC growth, the economy was increasing the average eficiency of the economy (the capital-energy ratio), shielding the economy against the impact of the 2003-08 price shock.

Keywords: Energy use; vintage capital; energy price shocks; investment-specific technology shocks. (search for similar items in EconPapers)
JEL-codes: E22 E23 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2013-10
New Economics Papers: this item is included in nep-dge, nep-ene and nep-mac
Note: This paper was previously entitled “A Theory of Energy Use”. We thank Raouf Boucekkine for his comments to a first version of this paper. We also thank Fabrice Collard, Andrés Erosa, Cyril Monnet, Omar Licandro, Franck Portier and Jesús Ruiz for helpful comments, and Manuel García and Alberto Sánchez for excellent research assistance. Díaz, and Puch, thank respectively the Dirección General de Investigación, projects ECO2010-20614 and ECO2010- 17943, for financial support, and the EUI for its support during part of this research. Puch also thanks Fundación FocusAbengoa and FEDEA. We are grateful to participants of conferences 2012 REDg, 2012 SED Meetings, 2011 Wien Macro Workshop, as well as workshop participants at EUI.
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Working Paper: A theory of vintage capital investment and energy use (2013)
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