Stochastic Trends and Technical Change: The Case of Energy Consumption in the British Industrial and Domestic Sectors

Abstract

This paper estimates energy demand in the British domestic and industrial sectors and analyzes the extent to which energy-saving technological change is exogenous, or induced by the energy price. The paper implements models with a linear trend, models making use of the price decomposition of Dargay and Gately (1995a) and the Structural Time Series Models (STSMs) of Harvey (1989). Stochastic trends have been found to be rather important while in neither of the sectors assessed in this study could the hypothesis of symmetric price effects be rejected. Following Hunt and Judge (2005), stochastic trend and asymmetric price effects are found to be substitutes in the industrial sector. In particular we conclude that asymmetric price effects can substitute for the slope in the stochastic trend. Finally, energy consumption in the industrial sector is strongly influenced by price while the effect of price in the domestic sector is markedly smaller.