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Macroeconomic Consistency Issues in E3 Modeling: The Continued Fable of the Elephant and the Rabbit

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  • Frédéric Ghersi
  • Jean-Charles Hourcade

Abstract

Starting from a short presentation of the limits of using conventional production functions to hybridize energy-economy relationships, this paper presents a methodology aiming at a better integration of bottom-up policy scenarios in a top-down static general equilibrium framework. Along the lines of Ahmad’s innovation possibility curve, the methodology consists in implementing top-down envelopes of production and demand functions, whose variable point elasticities of substitution provide a flexible interface for calibration on any bottom-up expertise. Numerical experiments assessing the impact of a rising carbon tax on the global 2030 economy compare the application of this methodology to that of two standard CES-based approaches. Results confirm that, in case of large departures from reference scenarios or of strong convexities in bottom-up results, the use of conventional CESproduction and utility functions may lead to a significant bias in cost assessment.

Suggested Citation

  • Frédéric Ghersi & Jean-Charles Hourcade, 2006. "Macroeconomic Consistency Issues in E3 Modeling: The Continued Fable of the Elephant and the Rabbit," The Energy Journal, , vol. 27(2_suppl), pages 39-61, June.
    • Handle: RePEc:sae:enejou:v:27:y:2006:i:2_suppl:p:39-61
    DOI: 10.5547/ISSN0195-6574-EJ-VolSI2006-NoSI2-3
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    References listed on IDEAS

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    2. Avi J. Cohen, 2003. "Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies?," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 199-214, Winter.
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    More about this item

    Keywords

    E3 modeling; Energy economy models; Hybrid modeling; Bottom up; Top down;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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