Energy prices volatility and the United Kingdom: Evidence from a dynamic stochastic general equilibrium model

Abstract

This paper analyses the consequences and effects of volatile energy prices in the UK. The evidence provided are from an estimated DSGE model of energy. The model is applied on filtered data from 1981:Q1 to 2013:Q1 and evaluated by the indirect inference testing. In analysing the structural shocks, the study found higher volatility in energy prices shock during the Great Recession compared to the sample period. The high volatility of energy prices shock caused inflationary pressures in the economy. The study found energy prices shock amplified the Great Recession by significantly contributing to the fall in output. Thus, energy prices shock is an important driver of economic activity. However, given the shocks are stationary, energy prices shock is temporary. Therefore, all consequences of energy prices in the economy are short-term. By implication, when volatile energy prices create an output shortfall, monetary policy is the tool used to offset short-term falls in output. We find results persists with robustness check. The findings justified why the DSGE model is a policymakers' workhorse.

Evidence on clean energy consumption and business cycle: A global perspective

“…This stylised fact has more theoretical implications, especially as it is crucial for characterising the volatility of clean energy consumption across the country groups. A bulk of literature has already investigated the consequences and effects of volatile energy prices in the RBC framework (Huynh, 2016; Kim & Loungani, 1992) or the DSGE model (Aminu, 2019). Our stylised fact uncovers that the selection of structural parameters in analysing clean energy shock should consider the country heterogeneity.…”

“…Huynh (2016) studies the impact of a wide set of energy price shocks on external balances using a two‐country framework comprising multiple sectors and endogenous energy production with convex costs and highlights the immediate channel through which energy prices impact the non‐energy trade balance. The latest study conducted by Aminu (2019) analyses the effect of volatile energy prices in the UK and finds higher volatility in energy price shock during the Great Recession compared to the sample period, which further causes inflationary pressures in the economy. Although current studies fail to include clean energy in the theoretical model analysis, this will become important for future research to examine how clean energy price shock affects the macroeconomy.…”

Optimal Environmental Tax Rate in an Open Economy with Labor Migration—An E-DSGE Model Approach

“…Similar to Fischer and Springborn [13], they find that the volatility of macroeconomic variables is dampened even if the emission cap is only imposed in the energy sector (Due to space constraint, all studies that utilitize E-DSGE models are not reviewed here; other important studies include Zhang [22], Krajewski and Mackiewicz [23][24][25]. In addition, it is worth noting that E-DSGE model have been applied to the field of energy economics; notable examples include but are not limited to Balke and Brown [26], Aminu [27] and Mȃnescu and Nuño [28]. ).…”

Investigation and Optimisation of the Steady-State Model of a Coke Oven Gas Purification Process

“…The prices of different energy sources are one of the most significant driving forces of economic growth and development of industrialised societies [1]. They influence production costs, wages, and the prices of raw materials and products [2]. Therefore, it is essential to reduce energy consumption, especially for energy-intensive sectors such as coke oven plants, steelworks, paper mills, or refineries.…”

“…In the objective function, H 2 S is the H 2 S quantity in output gas, and NH 3 is the NH 3 quantity in output gas 2. In the objective function, DWTEMP is the temperature of de-acidified water, CWTEMP is the temperature of coal water, H 2 S is the H 2 S quantity in output gas, and NH 3 is the NH 3 quantity in output gas.…”