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Relative energy price and investment by European firms

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  • Ratti, Ronald A.
  • Seol, Youn
  • Yoon, Kyung Hwan

Abstract

A dynamic model of investment is estimated with data on non-financial firms in 15 European countries across 25 industries over 1991-2006. A rise in real energy price reduces the degree of persistence in the investment adjustment cost function. Panel results suggest that in manufacturing a 1% rise in real energy price reduces investment by a country's firms by 1.9% relative to that by firms in other countries with a smaller effect for non-manufacturing firms. The negative effect of a higher relative price of energy on firm-level investment is significantly less marked the larger the firm. Results imply that stabilizing the relative price of energy would steady firm investment with greater gains in stability at smaller and medium sized firms. Results are robust to consideration of country business cycle effect and firm leverage. Estimation of investment is based on the Euler equation approach with over 21,000 observations. Individual country regressions imply that a rise in the relative price of energy price has a statistically significant negative effect on firm-level investment in 14 out of 15 countries. To avoid dynamic panel bias estimation is by generalized method of moments with instrumental variables.

Suggested Citation

  • Ratti, Ronald A. & Seol, Youn & Yoon, Kyung Hwan, 2011. "Relative energy price and investment by European firms," Energy Economics, Elsevier, vol. 33(5), pages 721-731, September.
    • Handle: RePEc:eee:eneeco:v:33:y:2011:i:5:p:721-731
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