Energy-Saving Technical Change
We estimate an aggregate production function with constant elasticity of substitution between energy and a capital/labor composite using U.S. data. The implied measure of energy-saving technical change appears to respond strongly to the oil-price shocks in the 1970s and has a negative medium-run correlation with capital/labor-saving technical change. Our findings are suggestive of a model of directed technical change, with low short-run substitutability between energy and capital/labor but significant substitutability over longer periods through technical change. We construct such a model, calibrate it based on the historical data, and use it to discuss possibilities for the future.
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Financial support from Mistra-SWECIA is greatly appreciated, as is support from the European Research Council.