What Matters More for the Output Drop After an Energy Price Increase: Household or Firm Energy Share?∗

We perform sensitivity analysis over the calibration targets for energy use in Dhawan and Jeske (2006). Our exercise is motivated by the fact that Dhawan and Jeske target average energy use over the 1970-2005 period, while the observed energy use relative to output declined rapidly over the period. We therefore investigate how different energy ratios affect the response to energy price shocks. Specifically, we compute how alternative energy use calibration targets affect the output drop in response to an energy price hike. We find that a model with higher energy use calibrated to the 1970-1985 period generates slightly higher output responses to an energy price hike, yet still not large enough to account for a sizeable share of output fluctuations. We also find that a larger steady state household energy share slightly decreases the negative impact on output from an energy price hike