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Capital-Energy Substitutionin the Long Run

Econometric modeling of production relationships, especially those of manufacturing industries, entered a period of intense activity with the dramatic energy price shocks of the past ten years. This work has called attention to possibilities for substitution between energy and other factors, but it has not yet led to consensus on all the important issues.' One open issue has to do with the relative substitutability of fixed capital for energy, compared with the substitutability of other factors for energy. One set of studies, generally those based on international cross-section data, finds capital and energy to be Hicksian substitutes. Other studies, based on time series data, find them to be Hicksian complements.

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Energy Specializations: Energy Modeling – Integrated Assessment Modeling

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, D22: Firm Behavior: Empirical Analysis, G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

Keywords: Energy-capital substitution, Manufacturing, Putty-clay model, Energy conservation

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-7

Published in Volume 5, Number 2 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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