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What drives industrial energy prices?

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  • Camacho, Maximo
  • Caro, Angela
  • Peña, Daniel

Abstract

Understanding whether the drivers of industrial energy prices are worldwide, group-specific or country-specific is a key issue in economics. This requires flexible econometric models to examine large data sets containing a significant variety of industrial sectors in different countries. To this end, we propose an extension of a dynamic factor model with group structure to account for observable country-specific explanatory variables and develop Monte Carlo simulations to show its good finite sample performance. Using data from 12 industrial sectors in 30 countries during the period from 1995 to 2015, we find three drivers of energy prices: (i) a common factor, the main driving force, captures the worldwide dynamics; (ii) country-specific variables, mainly related to inflation and the use of renewable and waste resources; and (iii) group-specific factors, which are more related to country affiliation than to sector classification.

Suggested Citation

  • Camacho, Maximo & Caro, Angela & Peña, Daniel, 2023. "What drives industrial energy prices?," Economic Modelling, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:ecmode:v:120:y:2023:i:c:s0264999322003959
    DOI: 10.1016/j.econmod.2022.106158
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    References listed on IDEAS

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    More about this item

    Keywords

    Energy prices; Dynamic factor model; Clustering; Penalized regression;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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