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Atlanta Fed Working Papers

What Determines the Output Drop after an Energy Price Increase: Household or Firm Energy Share?

Rajeev Dhawan and Karsten Jeske
Working Paper 2007-20
August 2007

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During the past thirty-five years, energy use as a fraction of output has dropped significantly at both the household and the firm levels. Therefore, we investigate a dynamic stochastic generalized equilibrium model economy's response to an energy price hike for different firm and household energy shares. Simulation results indicate that the economy's output response is mainly determined by the firm energy share. Increasing the household energy share while keeping firm energy share constant actually decreases the output response.

JEL classification: E32, Q43

Key words: energy prices, business cycles, durable goods

The authors thank seminar participants at the Federal Reserve Bank of Atlanta for helpful comments. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Karsten Jeske (contact author), Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8825, 404-498-8956 (fax),, or Rajeev Dhawan, Robinson College of Business, Georgia State University.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.

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