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Stochastic Trends and Technical Change: The Case of Energy Consumption in the British Industrial and Domestic Sectors

Abstract:
This paper estimates energy demand in the British domestic and indus�trial sectors and analyzes the extent to which energy-saving technological change is exogenous, or induced by the energy price. The paper implements models with a linear trend, models making use of the price decomposition of Dargay and Gately (1995a) and the Structural Time Series Models (STSMs) of Harvey (1989). Stochastic trends have been found to be rather important while in neither of the sectors assessed in this study could the hypothesis of symmetric price effects be rejected. Following Hunt and Judge (2005), stochastic trend and asymmetric price effects are found to be substitutes in the industrial sector. In particular we con�clude that asymmetric price effects can substitute for the slope in the stochastic trend. Finally, energy consumption in the industrial sector is strongly in.uenced by price while the effect of price in the domestic sector is markedly smaller.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling – Sectoral Energy Demand & Technology; Natural Gas – Markets and Prices; Electricity – Markets and Prices

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q55 - Environmental Economics: Technological Innovation
D42 - Market Structure, Pricing, and Design: Monopoly

Keywords: Structural time series models, Stochastic trends, Technical change, Energy demand, Industrial, Domestic, UK

DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No4-5


Published in Volume 31, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.