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.