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Models of energy in the United Kingdom

Aminu, Nasir Bashar 2015. Models of energy in the United Kingdom. PhD Thesis, Cardiff University.
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Abstract

In this thesis, I examine the impact of energy price shocks in the United Kingdom using a New-Keynsian Dynamic Stochastic General Equilibrium (DSGE) model and a classic Real Business Cycle (RBC) model. The models are augmented with real rigidities and driven by exogenous shocks. Chapter 1 examines a DSGE model with New-Keynesian Philips Curve with three outputs of energy (petrol and utility), and non-energy output, using filtered data (1981:Q1-2014:Q4) of the UK. Chapter 2 examines a two-sector (RBC) model of energy intensive output and non-energy intensive output, using unfiltered data (1990:Q1-2014:Q4) of the UK. The models are econometrically estimated using indirect inference test that includes Monte Carlo simulation. I show how the study can be quantitatively applied by evaluating the effects of different shocks on output, relative prices and interest rate. I also show how energy price shocks affect output, asset prices and aggregate consumption in a classic RBC model. By decomposition, the changes in these variables caused by each of the structural shocks showed that a fall in output during the financial crisis period 2008:Q2 to 2009:Q4 was driven by energy price shocks and sector-specific productivity shocks. Conversely, in the DSGE model with NKPC, the changes in these variables caused by each of the structural shocks showed that a fall in output during the financial crisis period 2008:Q2 to 2009:Q4 was driven by domestic demand shocks (consumption preference, government spending and capital adjustment cost), oil prices shock and world demand shock. I found why the energy price shock reduces GDP in the models: In NKPC model with stationary shocks this is only a temporary terms of trade shock and so GDP only falls briefly, such that, the UK can borrow against such a temporary fall. In the RBC two-sector model, I found, it must be that the terms of trade rise permanently when world energy price increase as it is non-stationary and there is no other way to balance the current account than to reduce absorption due to lack of substitute for energy inputs. Finally, I found that the RBC two-sector model with non-stationary shocks performs better than NKPC model with stationary shocks. The performance can be credited to using unfiltered-data on the RBC model. This thesis show how estimated models can create additional input to the policymaker’s choice of models through the economic shocks’ effects of the macroeconomic variables.

Item Type: Thesis (PhD)
Status: Unpublished
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Funders: Petroleum Terch Fund Nigeria
Date of First Compliant Deposit: 30 March 2016
Last Modified: 23 Mar 2017 05:50
URI: http://orca.cf.ac.uk/id/eprint/88311

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