Energy consumption at business cycle horizons: The case of the United States

In this paper, we propose a simple extension to a Keynesian type macro model by augmenting it with energy consumption. We show the relationship between energy consumption and output in a macroeconomic setting and ask the question: Do permanent shocks dominate changes in energy consumption and output at business cycle horizons for the United States? To achieve the goal of this paper, we undertake a variance decomposition analysis of shocks based on a common trend and common cycle framework within a vector error correction model. Our main finding is that permanent shocks explain the bulk of the variations in energy consumption and output at business cycle horizons for the United States. (C) 2010 Elsevier B.V. All rights reserved.