Energy-Saving Technological Change and the Great Moderation

The “Great Moderation” referring to the mitigated volatility of output and other aggregate variables, began in the mid-1980s in the United States. In this paper, we discuss the contribution of energy-saving technological progress toward the Great Moderation. The time path of energy-saving technology is estimated following the approach by Hassler, Krusell, and Olovsson (2011) and fed into a standard real business cycle model with energy as a production input. The simulation results show that the impulse response of value added to a 10% energy price shock is mitigated from −0.54% to −0.34% due to energy-saving technological progress. This implies that such progress is partially accountable for the Great Moderation.


Introduction
The "Great Moderation," referring to the mitigated volatility of output and other aggregate variables such as consumption, investment and hours worked, began in the mid-1980s in the United States.Table 1 displays the cyclical behavior of the U.S. economy from 1949 to 1983, 1984 to 2009, and 1949 to 2009.The break point between periods corresponds to previous studies such as Kim and Nelson (1999) and McConnell and Perez-Quiros (2000).All data are logged and detrended using the Hodrick-Prescott filter.(Note 1) Energy use is defined as the unweighted sum of primary energy consumption (petroleum, natural gas, coal, and nuclear electric power).Energy price is calculated by dividing the energy price deflator by the GNP deflator.(Note 2) As shown in Table 1, the volatility of all variables except energy price declines from the first (early) to the second (late) sample periods.In particular, the volatility of output reduces by 37% even though the late period includes a sharp drop in output triggered by the financial crisis in 2008.
Several reasons for the Great Moderation are discussed in previous studies, and these can be broadly divided into two groups.The first focuses on the importance of the reduced volatility of exogenous shocks.For instance, Arias, Hansen, and Ohanian (2007) show that the volatility of output declines simply because the volatility of total factor productivity (TFP) is approximately halved.Another group focuses on structural changes.Jaimovich and Siu (2009) claim that demographical changes can significantly contribute to the Great Moderation.McConnell and Perez-Quiros (2000) emphasize the role of better inventory management, whereas Clarida, Gali, and Gertler (2000) underscore the improvement in monetary policy.
In this paper, the role of energy-saving technological progress in the Great Moderation is examined.Blanchard and Gali (2008) show that the negative impulse response of output to an oil price shock is muted since the mid-1980s.We conjecture that the output response to an oil price shock has been weakened because of improvements in energy-saving technology.To examine this hypothesis, the time series of energy-saving technology is estimated following the approach by Hassler et al. (2011) and fed into a standard real business cycle model with energy as a production input.We then compare the impulse responses of the aggregate variables driven by an energy price shock between the two sample periods.The simulation results indicate that energy-saving technological progress has partially contributed to the Great Moderation.
The remainder of the paper is organized as follows: Section 2 describes the model, Section 3 discusses the data and calibrations, Section 4 presents the simulation results, and Section 5 concludes.

Hassler et al mpetition in th
Inte n e and energy u s calculated as dividing the n primary energ ritish thermal uels, we also in ce the first oil shown, the co % of total prima  All impulse responses, as shown in Figure 4, are mitigated due to energy-saving technological progress.In particular, while the value added declines 0.54% because of a relatively low level of energy-saving technology, it decreases only 0.34% with a high level of energy-saving technology.That is, the impact of an energy price shock on value added is mitigated by 37%.Thus, we conclude that the improvements in energy-saving technology are partially responsible for the Great Moderation.

Conclusion
In this paper, we investigate the impact of energy-saving technological progress on the Great Moderation using a standard real business cycle model with energy use as an input.As in Hassler et al. (2011), we observe improvements in energy-saving technology following the first oil crisis.We subsequently incorporate into our model the actual sample averages of energy-saving technology from 1949 to 1983 and 1984 to 2009 and quantify the influence of this technological improvement on the Great Moderation.Our impulse response analysis of a 10% energy price shows that the value added declines 0.54% in the 1949-1983 period but only 0.34% in the 1984-2009 period.This suggests that the Great Moderation is partially a result of energy-saving technological change.
Note 4. Exports are equal to imports in each period so that the trade balance is always zero.Note 5. Another reason why the nuclear electric power is included into the definition of energy use is that if the energy use only refers to the consumption of fossil fuels, substituting fossil fuels for nuclear electric power can be interpreted as energy-saving technological progress, which is not necessarily correct.Note 6.For simplicity, it is assumed that the persistence parameter is 0.9.Note 7. Another aspect of an energy price shock is that it plays an important role in reducing the high correlation between wages and hours worked in standard real business cycle models.See Kim and Loungani (1992) for details.
Figure 1.ked and emplo tual inventory A). re set in a stand elasticity of s he maximum = 0.0053.W he standard de st square (OLS es Figure 3 d (Note 6) T however,