Energy Costs, Endogenous Innovation, and Long-run Growth

Summary Based on the observation that energy costs have been decreasing over much of the 20th century, this paper extends the Romer (1990) model of endogenous technological change to examine the impact of secular changes in energy costs on technological progress and long-run growth. The key finding is that decreasing energy costs, while unambiguously increasing the rate of growth of output, enhance or reduce the rate of technological progress depending on the representative household's elasticity of marginal utility. A calibration exercise shows that even if technological progress is actually neither enhanced nor reduced, the endogenous innovation model of growth predicts a substantially stronger effect of energy costs on growth than the neoclassical model.