EMF OP 56 Price Asymmetry as Induced Technical Change

A significant challenge for projecting the long-run demand for energy is how best to incorporate price-induced technical change (ITC) and how to differentiate this effect from price-induced direct substitution. This discussion reviews several recent analyses that compare symmetric with asymmetric responses to price and evaluates each approach according to its ability to incorporate ITC. The paper concludes that (1) asymmetric specifications should be seriously considered if Wald tests reject symmetry, (2) an important reason for considering asymmetries is that price-induced technical change (ITC) may be very important for many long-term problems, and (3) an important limitation of symmetric models with fixed yearly effects is that the dummy variables capture many factors that have nothing to do with price.