Energy prices, growth, and the channels in between: Theory and evidence

•I present stylized cross-country evidence for the relationship between energy use and economic growth.•The paper develops a multisector framework to derive the growth impact of energy.•The structural model is empirically estimated for a sample of 37 developed countries with five-year average data.•Empirical results show a dynamic effect of energy use, that is a negative impact of energy on capital investments.•The estimations of simultaneous equations exhibit that the growth effect counteracts the static effects of lower energy use.

The paper presents stylized cross-country evidence for a negative relationship between energy use and economic growth. Based on this motivation it develops a multisector framework to derive the growth impact of energy from first principles. The structural model is empirically estimated for a sample of 37 developed countries with five-year average data over the period 1975–2009. Estimations of both separate equations and simultaneous systems of equations are performed. The empirical results show a negative impact of energy use on investments in physical capital and knowledge formation. The estimations of simultaneous equations exhibit a dynamic effect of energy use: decreasing energy input and increasing energy prices induce additional investments fostering long-run growth. The growth effect counteracts the negative static effects of lower energy use.