The Simulation Analysis of Energy Price Shock and Business Cycle

This paper analyzes the effects of energy price shocks from a general equilibrium standpoint of the features of modern business cycles. This study modifies a typical real business cycle model with indivisible labor by explicitly including energy as a productive input and modeling the relative price of energy as an exogenous random process. In closed models, the production technology of firms is described by alternative specifications, which include Cobb-Douglas and regular CES functions. Based on the quarterly data of 1996-2005 in China, we examine the effect of energy price shock on macroeconomic activities by model simulation. The findings are that energy price shock does influence output and the price change effect of energy will cause substitution effect between labor and energy use.