Essays on energy and macroeconomics

• Main Author: Oyekola, Olayinka
• Published: Cardiff University 2016
• Subjects: 339; HB Economic Theory
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.681316

This thesis represents largely the two sides to both theory and econometrics of dynamic macroeconomics, namely stationary and non-stationary models and data. The stationary part concludes with Chapter 3 and in Chapter 4, I look at the non-stationary side. More speci�cally, I preview the thesis in Chapter 1 highlighting the modelling and econometric approaches commonly found in the economics literature; also I report some key results. In Chapter 2, I provide a comprehensive, but certainly far from being exhaus- tive, review of the literature dating back to the publication of Stanley Jevon�s (1866) The Coal Question, but with the main discussion beginning with Harold Hotelling�s (1931) The Economics of Exhaustible Resources. I develop a two-sector open economy extension to the Kydland and Prescott (1982), Long and Plosser (1983) and Kim and Loungani (1992) models in Chapter 3 and estimate it on H-P �ltered annual U.S. data covering 64 years, with the main purpose of discovering how energy price along with other supply-side and demand-side shocks (imported and domestic) impacts on the U.S. economy. The model presented only contains the current account and I restrict trade to balance in every pe- riod. I �nd that model �ts the data for my benchmark variables of interest in the auxiliary model: output, real exchange rate, energy use, and consumption. When more variables and in particular sectoral variables are added, meanwhile, to the auxiliary model, I �nd that the model�s performance especially as it relates to this estimated model parameters did not �t. What I take from this is that the estimated structural parameters are not globally applicable within this economic environment. This model is then further extended by including the capital account in Chapter 4 before re-estimation, but now also on non-stationary data, which I suppose is more repre- sentative of reality. I focus on the �t of the model to output and the economy�s measure i of competitiveness: the real exchange rate. I �nd that the energy price and technology shocks have major e¤ects on the U.S. output and relative competitiveness. The mecha- nisms by which these e¤ects are transmitted are two-fold. First is via the terms of trade occurring as a resource drain on the economy as the U.S. would need to �nd extra resource to commit to the import of crude oil. The second is via household�s reduced investment activity. Both channels can be explained by the fact that the substitution away from oil is happening at too slow a pace because of low estimated elasticities parameters. This agrees with Hamilton who argued that oil shock works via demand contraction. I have in this thesis veri�ed his conjecture via a well-motivated and detailed microfounded dynamic stochastic general equilibrium (DSGE) model. Finally, I review the thesis speculating on possible future extensions in Chapter 5.