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EMF OP 56: Price Asymmetry as Induced Technical Change

Occasional Paper

A significant challenge forprojecting the long-run demand for energy is how best to incorporateprice-induced technical change (ITC) and how to differentiate thiseffect from price-induced direct substitution. This discussion reviewsseveral recent analyses that compare symmetric with asymmetricresponses to price and evaluates each approach according to its abilityto incorporate ITC. The paper concludes that (1) asymmetricspecifications should be seriously considered if Wald tests rejectsymmetry, (2) an important reason for considering asymmetries is thatprice-induced technical change (ITC) may be very important for manylong-term problems, and (3) an important limitation of symmetric modelswith fixed yearly effects is that the dummy variables capture manyfactors that have nothing to do with price.

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