Description

This paper examines the real effects that a rise in the electricity rate would have on the Chilean economy. In general, the results and conclusions of the literature attest to the difficulties that arise when trying to predict the macroeconomic effects of such a shock. The results obtained with stochastic general equilibrium models are sensitive to the value of the elasticity of substitution between energy and the production factors. According to the models, for the commonly used substitution elasticities for Chile, a permanent shock of + 10% in the price of electricity would cause a drop in steady-state GDP between -0.3% and -0.4%, and of about -1% in consumption and investment. If, however, electric power could be more easily replaceable by labor and capital, the fall in steady-state GDP predicted by the model would be significantly lower (-0.1%). The regressions run using firm-level data suggest that a 10% increase in the electricity rate resulted in a -1.9% drop in investment and -0.1% in employment in manufacturing firms.