ENERGY PRICES AND THE AGGREGATE PRODUCTION FUNCTION

This paper tests the hypothesis that the effects of increases and decreases in relative energy prices on output are symmetrical. Alternative ratchet specifications are embedded in an aggregate production function for private sector output and estimated using US data. The major finding is that the relationship between relative energy prices and output is highly asymmetrical. Increases in relative energy prices above previous peak levels have a substantial deleterious effect on output. Decreases in relative energy prices and increases below the previous peak have no effect on output.