A theory of vintage capital investment and energy use

In this paper we propose a theory of investment and energy use to study the response of macroeconomic aggregates to energy price shocks. In our theory this response depends on the interaction between the energy efficiency built in capital goods (which is irreversible throughout their lifetime) and the growth rate of Investment Specific Technological Change (ISTC hereafter). We show that ISTC is a sort of energysaving technical change and, therefore, a substitute of energy efficiency: it rises the productivity of capital without rising energy use, which increases effective energy efficiency (i.e., the amount of energy use required per unit of quality-adjusted capital). Hence, our theory can account for the fall of energy use per unit of output observed during the 1990s, a period in which energy prices fell below trend. By increasing investment in the years of high ISTC growth, the economy was increasing the average efficiency of the economy (the capital-energy ratio), shielding the economy against the impact of the 2003-08 price shock.Díaz, and Puch, thank respectively the Dirección General de Investigación, projects ECO2010-20614 and ECO2010-17943, for financial support, and the EUI for its support during part of this research. Puch also thanks Fundación FocusAbengoa and FEDEA