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Energy Price Increases and Macroeconomic Policy

Abstract:
A rising world price of energy imposes a macroeconomic cost on the United States in two different ways. First, to the extent that energy is both an important input to production and a consumption good, with limited elasticities of substitution and demand, the economy's production and consumption possibilities are necessarily reduced as energy becomes more scarce. Thus, even if an expansionary monetary and fiscal policy were successful in pushing the economy close to its full capacity level, the resulting real national income would be lower than if energy prices had notAn earlier version of this paper was presented at the CEPR Conference on Energy Prices, Inflation and Economic Activity, Cambridge, November 9, 1979. Work leading to this paperwas supported by the Center for Energy Policy Research of the M.I.T. Energy Laboratory, and that support is gratefully acknowledged. In writing this paper, I benefited considerablyfrom conversations with and comments from Olivier Blanchard, Stanley Fischer, Benjamin Friedman, Robert Hall, Franco Modigliani, Robert Solow, and an anonymous referee.

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Energy Specializations: Petroleum – Policy and Regulation; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Energy and the Economy – Energy as a Productive Input; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance; Energy and the Economy – Energy Shocks and Business Cycles

JEL Codes: Q40: Energy: General, Q41: Energy: Demand and Supply; Prices, E31: Price Level; Inflation; Deflation, E52: Monetary Policy

Keywords: Energy prices, Price spikes, Macroeconomic policy

DOI: 10.5547/ISSN0195-6574-EJ-Vol1-No4-1

Published in Volume 1, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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