The role of energy prices in the Great Recession — A two-sector model with unfiltered data

We investigate the role of energy shocks during the Great Recession. We study the behaviour of the UK energy and non-energy intensive sectors firms in a real business cycle (RBC) model using unfiltered data. The model is econometrically estimated and tested by indirect inference. Output contraction...

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Bibliographic Details
Published in:Energy economics 2018-03, Vol.71, p.14-34
Main Authors: Aminu, Nasir, Meenagh, David, Minford, Patrick
Format: Article
Language:English
Subjects:
Absorption
Business cycles
Business models
Contraction
Energy
Energy economics
Energy price shock
Energy prices
Great Recession
Inference
International trade
Output
Prices
Production
Productivity
Productivity shock
RBC
Recessions
Sample variance
Terms of trade
Unfiltered data
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Summary:We investigate the role of energy shocks during the Great Recession. We study the behaviour of the UK energy and non-energy intensive sectors firms in a real business cycle (RBC) model using unfiltered data. The model is econometrically estimated and tested by indirect inference. Output contraction during the Great Recession was largely caused by energy price and sector-specific productivity shocks, all of which are non-stationary and hence tend to dominate the sample variance decomposition. We also found that the channel by which the energy price shock reduces output in the model is via the terms of trade: these fall permanently when world energy prices increase and as substitutes for energy inputs are strictly limited there are few reactions via production channels. Therefore, there is no other way to balance the deteriorating current account than through lower domestic absorption. •Analysis of the UK energy and non-energy intensive sectors firms in a real business cycle (RBC) model.
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2018.01.030