Energy Economics 22 Ž2000.

569᎐586

The demand for energy in Greek

manufacturing
Dimitris K. ChristopoulosU
Department of Economics and Regional De¨ elopment, Panteion Uni¨ ersity, Syngrou A¨ e.
136, 17671 Athens, Greece

Abstract

This paper considers an econometric approach to measuring substitutability of three types

of energy, i.e. crude oil, electricity and diesel with capital and labour in the manufacturing
sector of Greek industry during the period 1970᎐1990. A general dynamic framework is
developed under the assumption that the structure of the production process is weakly
separable in capital, labour and energy aggregates. The translog total cost function is used to
represent the production technology. The main advantages of the proposed dynamic
structure are that it is both disaggregated in energy components and consistent with the
neo-classical theory of production. 䊚 2000 Elsevier Science B.V. All rights reserved.

JEL classifications: C51; D24; Q41

Keywords: Energy; Separability; Dynamic structure

1. Introduction

Greek industry has undergone considerable restructuring during the last two
decades, bringing great changes in the inputs used, especially of energy. On the
one hand, the cost share of capital dropped in every two-digit industry under
consideration ŽPalaskas et al., 1999.. On the other hand, the problem of labour
scarcity that emerged in the late 1960s and early 1970s Žsee Lianos, 1975. has been

U
Fax: q30-1-9229-315.
E-mail address: Christod@panteion.gr ŽD.K. Christopoulos..

0140-9883r99r$ - see front matter 䊚 2000 Elsevier Science B.V. All rights reserved.
PII: S 0 1 4 0 - 9 8 8 3 Ž 9 9 . 0 0 0 4 1 - 9
570 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586

eliminated Žsee Christopoulos, 1995.. The rate of unemployment in 1972 was 1.8%
and the emigration rate was still quite high. At the same time, energy emerged as
an important input in the production process of Greek manufacturing. The share
of the three main sources of energy, crude oil, diesel and electricity, increased
significantly during the last two decades, as a percentage of the total cost in the
sector ŽPalaskas et al., 1999..
Given these changes in the Greek industrial sector in recent years a number of
authors ŽSamouilidis and Mitropoulos, 1982; Vlachou and Samoulidis, 1986; Do-
natos and Mergos, 1989; Kintis and Panas, 1989; Caloghirou et al., 1997; Palaskas
et al., 1999. have focused attention on the degree of substitution among energy
sources and primary inputs of production Žcapital and labour.. The question of the
degree of energy substitutability is of great importance in predicting economic
disruptions arising from energy shortages and it has important implications for
public policy. For example, higher energy prices induce cost-minimising firms to
substitute toward capital and labour, and higher electricity prices induce firms to
substitute towards some combination of capital, labour and alternative energy
types. This will have important industrial effects and it will affect capital utilisation,
employment, etc. In addition, energy substitutability can assist in addressing
important issues, including the feasibility of various energy demand profiles, the
evaluation of alternative environmental policies, and the impact of carbon or
energy-use taxes.
All previous empirical studies of energy substitution in Greek manufacturing
suggest that energy and labour, and energy and capital are substitutes, with the
exception of Kintis and Panas Ž1989. who found that energy and capital are
complements. However, these studies have some shortcomings. All approaches are
static and hold only in equilibrium. More specifically, none of the previous studies
takes into account the static misspecification errors that arise when an instanta-
neous adjustment process is not appropriate. The static versions of the models
neglect the dynamics of adjustment, which results in inadequate knowledge of the
adjustment path and the long-run structure. Knowledge of the adjustment process
is important in addressing policy issues arising from alternative tax structures or
exogenous energy price shocks. Therefore, under the static specification the
estimators will not provide reliable computed elasticity for policy design and policy
making. Thus, by assuming a static production model the applied researcher may
be led to misguided conclusions.
Given the drawbacks of the static models in terms of estimation, hypothesis
testing and analysis, a different approach is adopted here. Following Fuss Ž1977.
and Pindyck Ž1979. we assume that the structure of production is weakly separable
in capital, labour and energy aggregates. With this restriction it is possible to
estimate a production structure with producers choosing cost-minimising factor
inputs in two stages. First, an energy sub-model is derived from the separability
restrictions, and is estimated optimising the mix of crude oil, diesel and electricity
and generating an aggregate energy price index. Second, the model optimising the
cost of aggregate inputs and explaining the demand for those inputs is estimated.
 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586 571

To incorporate dynamic adjustments, a general dynamic demand framework is

constructed using the translog cost-function. Thus, a dynamic structure of the
demand for energy in Greek manufacturing is obtained, which is both disaggre-
gated in energy components, consistent with the neo-classical theory of production,
and flexible enough to accommodate a rich pattern of dynamic behaviour.
The paper is organised as follows. In Section 2 the theoretical model is pre-
sented. The dynamic formulation of the adopted model is contained and analysed
in Section 3. In Section 4 the statistical estimation is presented and the empirical
results are analysed. Also, in Section 4 we examine whether or not the estimated
relationships are structural or spurious. Section 5 concludes the paper.

2. The theoretical model

The specification of the model starts with the assumption that the technology
applied in the production process can be described by a twice differentiable
production function which relates the flow of output to various inputs of produc-
tion. In algebraic terms it can be expressed as
Y s F Ž X j ,T . j s 1,2,3, . . . . . . Ž1.

where Y is the output, X j is the u dimensional vector of inputs j, j s 1,2, . . . n:

N 1, . . . ,u4 and T is an index of technological progress. It is assumed in Eq. Ž1. that
F Ž X j ,T . is finite for every X and T and continuous for all non-negative Y and X.
It is also assumed that monotonicity is valid for F Ž X j ,T . and that the production
function is strictly convex, see for example, Diewert Ž1971. and Hall Ž1973..
Next it is assumed that the production function Ž1. is weakly separable with
respect to partition  N1 , . . . . . . Ns 4 . This means that the marginal rate of substitu-
tion ŽMRS. between any two inputs i and j from any subset Ns s  1, . . . . . . m4 is
independent of the quantities of inputs outside Ns , see Berndt and Christensen
Ž1973a.. In other words,

⭸ fi
s0 for all i , j g Ns and k f Ns .
⭸ Xk ž/
fj
Ž2.

⭸f
where f i s is the first derivative of F Ž X j ,T ..
⭸ Xj
The assumption of weak separability Ž2. with respect to partition  N1 , . . . . . . Ns 4
ensures that the aggregates exist and permits us to write the production function
Ž1. in the following form:

Y s F  X 1 Ž X i . , X 2 Ž X j . , . . . . . . X s Ž X s .4 i s 1, . . . . . . r , j s 1, . . . . . . l,
S s 1, . . . . . . m. Ž3.
where X 1 Ž X i ., X 2 Ž X j ., . . . . . . X s Ž X s . are aggregated functions with elements
labelled by indices i, j and S and X 1, X 2 , X s are aggregate inputs.
572 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586

Furthermore, we assume that aggregated functions in Ž3. are homothetic in their

components. This assumption provides a necessary and sufficient condition for an
underlying two stage optimisation procedure Žsee Denny and Fuss, 1977.: optimise
the mix of components within each aggregate and then optimise the level of each
aggregate. The existence of homothetic aggregation functions does not imply that
the overall production process is homothetic ŽApostolakis, 1988..
Given the production function Ž1. and the associated assumptions, the cost
function can be derived. According to duality principles, Samuelson Ž1947., Uzawa
Ž1964. and Shephard Ž1970., there is a cost function equivalent to the production
function that can represent the technology of production and vice versa.
To start with, it is assumed that the cost function that corresponds to the
production function can be written as

C Ž Pj ,Y ,T . s min P ) X s TC Ž4.

where C stands for total cost, Pj is the vector of input prices, and TC is the total
cost. The cost function Ž2. is considered, similarly to Ž1., to be twice differentiable
in Pj and T, finite for every Pj , Y G 0 and T, continuous in Y and Pj , linear
homogeneous in Pj and Y G 0, non-decreasing in Y and Pj, and concave in Pj .
Also the dual cost function Ž4. will be weakly separable if the aggregation in
production function Ž1. exists and the aggregate functions in Ž3. are homothetic in
their components Žsee Berndt and Christensen, 1973b..
Finally it is assumed that the specifiable factors of production are capital ŽK.,
labour ŽL., electricity ŽEL., diesel ŽD. and crude oil ŽM.. So the cost function Ž4.
can be written as follows:

C s g w PE Ž PM , PEL , PD . , PK , PL , Y , T x Ž5.

where PK is the price of capital, PL is the price of labour, PM is the price of crude
oil, PEL is the price of electricity, PD is the price of diesel and PE is an aggregate
price index of energy, i.e. a function that aggregates the energy prices of three
components types. As assumed previously, this aggregator function is homothetic in
the mix of energy types.1
Eq. Ž5. can be estimated in two stages: First a sub energy homothetic model with
constant returns to scale will be considered to construct an instrumental variable
for the price of energy. Second an aggregate non-homothetic cost function associ-
ated with Hicks non-neutral technological progress. So, the firms first minimise the
energy cost and then the total cost of production.
Under the hypothesis of minimisation of total cost ŽTC. the cost function Ž5. may
take various forms. The translog form is one, it can be expressed as ŽChristensen et
al., 1973.

1
Analogous aggregate functions can be formulated for the other aggregate inputs: capital and labour.
However, the lack of disaggregated data for capital and labour for Greek manufacturing make this
procedure inapplicable.
 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586 573

2
lnTC s a o q Ý ai ln Pi q 12 Ý Ý yi j ln Pi ln Pj q aY lnY q 12 aY Y ŽlnY .
i i j
2
q aT T q 12 aT T Ž T . q Ý ␦ Y i lnY ln Pi q Ý ␮ T i ln PiT q ␪T Y lnYT Ž6.
i i

where i, j s K,L,E.
Under conditions of perfect competition the logarithmic differentiation of Eq.
Ž6. with respect to input prices PK , PL , PE yields expressions for the demanded
quantity of the corresponding inputs in terms of cost shares ŽShephard’s Lemma.,
i.e.

MiTC s ⭸lnTCr⭸ln Pi s Ž Pi X i . rTC s a i q Ý yi j ln Pj q ␦ iY lnY q ␮ T iT Ž7.

j

where X i is the quantity demanded of the production input i and Mi is the cost
share of the input i demanded.
For the cost function Ž6. to satisfy the adding-up criterion Ý MiTC s 1, i s K,L,E
i
and the properties of the neo-classical production theory, the following linear
restrictions must be satisfied,

Ý ai s 1, yi j s y ji , Ý yi j s Ý ␦ iY s Ý ␮ T i s ␪ i s 0 Ž8.
i i i i

for i, j s K,L,E.
The restrictions Ž8. are necessary and sufficient conditions ensuring TC is
linearly homogeneous in input prices.
However, the price of energy Ž PE . is considered also to be an aggregate
function 2 wsee function Ž5.x. This aggregate function can be represented by a
homothetic translog cost function with constant returns to scale

ln PE s a o q Ý ␤ i ln Pi q 12 Ý Ý yi j ln Pi ln Pj Ž9.
i i j

The following energy cost share equations are implied by Shephard’s Lemma:

MiE s ␤ i q Ý yi j ln Pj Ž 10 .
j

where i, j s EL,D,M.
Again the adding-up criterion and the properties of neo-classical production
theory require the parameter restrictions

2
PE it is not a consistent aggregate price index if it is a simple weighted average of the Pi ,
i s EL,D,M unless the energy components are perfectly substitutable or complements in the production
process Žsee Berndt and Christensen, 1974..
574 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586

Ý ␤ i s 1, yi j s y ji , Ý yi j s 0 Ž 11.
i i

to be satisfied by the aggregate function.

Let us now review the steps involved in estimating the proposed model: first the
sub-energy model Ž10. is estimated subject to the constraints Ž11.. The estimated
parameters in Ž10. are substituted into Ž9. to obtain an aggregate price index for
energy. Next the factor share Eq. Ž7. is estimated subject to the restrictions Ž8.
using the estimated energy price index as an instrumental variable.

3. Modelling the dynamic structure of production using the translog cost function

The factor demand system Ž7. derived from the translog total cost function Ž6. is
static and holds only in equilibrium. This happens because the existence of convex
adjustment costs and the imperfections involved in obtaining information imply
that there is some delay in adjusting instantaneously actual capital, labour and
energy to their desired level following exogenous price and demand shifts. Analyti-
cally, the cost share Eq. Ž7. describes long-run structure. According to Anderson
and Blundell Ž1982. changes in the share in total cost MiTC of input i are responses
to anticipated and unanticipated changes in capital, energy and labour prices in an
attempt to maintain a long-run relationship of the form Ž6. in the sense that,
should capital, energy and labour prices stabilise to some constant value over time,
then so would the expected share of capital, energy and labour in total cost Ž MiTC ..
Furthermore, in the short-run there is uncertainty about the future course of
capital, energy and labour prices and output. Therefore, following an exogenous
shock the firms do not adjust instantaneously the three inputs, capital, energy and
labour to the desired level ŽNissim, 1984.. Thus, ignoring the dynamic element
would lead to inadequate knowledge of the adjustment process and of the long-run
structure.
To model the dynamic form of total cost share Eq. Ž7. 3 the transformation
proposed by Wickens and Breusch Ž1988. and Kesavan et al. Ž1993. is used. This
transformation identifies the long-run structure together with the short-run dy-
namics in demand for capital, labour and energy which it merges the long-run
steady-state theory with short-run time series properties of data and produces
elasticities that are robust for policy implication. In addition one more general
dynamic framework is obtained which achieves the desirable aspects of flexibility,
simplicity and identification of long-run parameters which can be considered as
long side alternative transformations Žsee Anderson and Blundell, 1982; Nissim,
1984; Banerjee et al., 1990..
A way to incorporate the dynamic structure of production in the total cost share
Eq. Ž7. is to write the system in the following form:

3
The short-run total cost function remains unspecified in our model because the total cost share Eq.
Ž6. contains all the information necessary to derive estimates for the long-run demand for energy and
input energy and non energy substitution.
 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586 575

L L L L
MiTC s Ý ⌽i k Mi ,tyk q a i q Ý ␥i j ln Pj,tyk q Ý ␦ i j lnYtyk q Ý ␮ T i Ttyk
i ,ks1 j,ks0 j,ks0 j,ks0
Ž 12 .

where in our application only the lag structure, k s 1 will be used.

L
The equations in the system Ž12. can be transformed by subtracting Ý ⌽ k Mt
ks1
from both sides of Ž12. ŽWickens and Breusch, 1988; Kesavan et al., 1993.. By
algebrical manipulation we obtain
L L
MiTC s Ý ⌽i k ⌬ k MiTC q a i q Ý ␥i j ln Pj q ␦ iY lnY q ␮ T iT y Ý ␤ i j ⌬ k ln Pj
i ,ks1 j j,ks1

y ␤ iY ⌬ k lnY y ␤ iT ⌬ k T Ž 13.

where ⌬ refers to annual differences and i s K,L,E.

In a similar way we transform the share Eq. Ž10. derived from the aggregator
energy function, obtaining
L L
MiE s Ý ⌽i ,K ⌬ K MiE q ␤ i q Ý ␥i j ln Pj y Ý ␤ i j ⌬ K ln Pj Ž 14 .
i ,ks1 j j,ks1

i s EL,D,M.

4. Statistical estimation

4.1. The estimation of the sub-energy model

Empirical implementation requires that the energy share Eq. Ž14. should be
statistically specified. Consequently, an error term is added to each equation
because of lags of cost in response to the changes in exogenous variables. Since the
shares of the three energy inputs ŽEL,D,M. always sum to unity Žadding-up
criterion Ý MiE s 1, i s EL,D,M. the sum of the disturbances across the three
i
share energy equations is zero at each observation. This implies a singular
disturbance covariance matrix. Therefore, in order to avoid singularity, one share
equation must be dropped Žthe equation of crude oil is deleted.. Following
Anderson and Blundell Ž1982. for the invariance of results due to arbitrary
deletion of one equation the restriction that the adjustment coefficients must be
equal across equations together with the one for long-run symmetry is considered
for the general dynamic form Ž14..
Non-linear iterative Zellner estimation Žsee Zellner, 1962, 1963. is used to
estimate the parameters of the dynamic model Ž14.. This procedure, which is
equivalent to maximum likelihood estimation ŽKmenta and Gilbert, 1968., assures
576 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586

Table 1
Tests of dynamic structure for the energy-sub model

␹2 Number of ␹20.95 ␹20.90 ␹20.75

restrtion

Partial adjustment 13.890 4 9.488 7.779 5.385

Static 12.428 5 11.070 9.236 6.625

that the estimates will be invariant to which the equation is deleted only under the
acceptance of null hypothesis of error correlations across equations Žsee Berndt
and Savin, 1975; Christopoulos, 1995..
For the reasons presented above, the IZEF method is adopted for estimating the
two dynamic equations in Ž14., using annual data from the Greek manufacturing
sector for the period 1970᎐1990.4 Also, its partial adjustment and the static
specifications of the general dynamic form Ž14. are estimated and compared
against the general specification Ž14..5
Starting with the statistical comparison between the general dynamic, the partial
adjustment and the static specification of the dynamic share energy system Ž14., the
likelihood ratio test of its dynamic structure is computed. The results are presented
in Table 1.
The ␹ 2 results in the second column of Table 1 reveal that the general dynamic
specification of the model Ž14. is superior to its corresponding partial adjustment.
Also, the general dynamic specification nests that of static at the 5% level of
significance. Therefore, the dynamic specification is adopted to estimate and
analyse the own and cross price elasticities of demand for energy components.
Parameter estimates for this model are presented in Table 2.
Next the own and cross price elasticities are estimated to measure the price
responsiveness. It can be shown, that for the translog energy cost function Ž9.
under the dynamic specification of share Eq. Ž14., these estimates can be calcu-
lated as follow:

␥ii
Ei i s ˆiE y 1
qM i s EL,D,M
M̂iE
Ž 15 .
␥i j
Ei j s ˆjE
qM i , j s EL,D,M
M̂iE

where i / j

4
For the nature and the structure of the variables see Appendix A.
5
The partial adjustment specification results from the imposition of the restrictions ␤ i j s 0 on the
parameters of the dynamic specification. The restrictions required to obtain the static model are the
partial adjustment restriction with the addition of ⌽i K s 1.
 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586 577

Table 2
Parameter estimates of translog-energy sub model for Greek manufacturing with homogeneity and
symmetry imposed in the long-run: 1970᎐1990 a

Equation I Želectricity . Equation II Ždiesel.

Parameters Coefficients Parameters Coefficients

YEL 0.669U YD 0.038U

Ž0.031. Ž0.004.
YEL EL 0.232U YDD y0.0126
Ž0.057. Ž0.0110.
YEL D 0.0205UUU YDEL 0.0205U
Ž0.0104. Ž0.0104.
⌽EL 0.807U ⌽D 0.807U
Ž0.186. Ž0.186.
␤EL EL y0.029 ␤DD y0.004
Ž0.130. Ž0.018.
␤EL D 0.164 ␤DEL 0.008
Ž0.149. Ž0.016.

R2 0.404 R2 0.565
SSR 0.103 SSR 0.002
OBS 19 OBS 19
QŽ5. 10.042 QŽ5. 1.151
QŽ10. 13.348 QŽ10. 1.947
a
The numbers in parentheses are the standard errors. U ,UUU Indicate statistical significance at 1%
and 10%, respectively. Q denotes the Box᎐Pierce Q statistic for serial correlation in the residuals. The
figures in parentheses are the degrees of freedom for ␹ 2 statistics. The 5% critical values are 11.070
and 18.307, respectively, for 5 and 10 d.f.s.

The estimates of own Ž Eii . and cross price Ž Ei j . elasticities 6 evaluated at the
mean values in the period 1970᎐1990 are presented in Table 3.
It can be seen from Table 3 that all long-run own price elasticites are negative
except for crude oil. However, the only result that appears to be statistically
different from zero is that for diesel. For this energy component the estimated

Table 3
Estimates of own and cross long-run price elasticities a

Electricity ŽEL. Diesel ŽD. Crude oil ŽM.

Electricity ŽEL. y0.02 Ž0.10. 1.12U Ž0.27. y0.07 Ž0.15.

Diesel ŽD. 0.08U Ž0.02. y1.29U Ž0.29. 0.02 Ž0.03.
Crude oil ŽM. y0.05 Ž0.11. 0.19 Ž0.32. 0.05 Ž0.15.
a
The effect of a change in the price of electricity on each of the components is contained in the first
row, etc. The figures in parentheses are the standard errors. U , denotes significance at 1%.

6
The long-run own and cross price elasticities for energy components are derived under the
assumption that the total energy cost is held constant.
578 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586

long-run own price elasticity is higher, in absolute value, than unity. This means
that the demand for diesel is very responsive to a change in its own price. So, an
increase in the price of diesel by 10% will decrease the amount of diesel demanded
by 12.9%.
Turning to long-run cross price elasticities, the results suggest that they are
positive but statistically zero, apart from cross price elasticities of diesel and
electricity which also exhibit a positive sign but, are statistically different from zero
at the 1% level. The size of substitution between electricity and diesel is high7 with
respect to the price of electricity and low with respect to the price of diesel. This
means that a 5% increase in price of electricity, given the price of other inputs, will
lead to a 5.6% increase in the relative share of diesel whereas a 5% increase in
price of diesel, given the price of other inputs, will lead to a 0.4% increase in the
relative share of electricity.
Overall the results suggest that the demand for diesel, holding constant the total
energy cost, is highly sensitive to price movement, while for electricity and crude oil
the high standard errors make it impossible to draw any conclusion about their
price responsiveness. Finally, there is no evidence for inter-energy substitution
except for high level of substitutability of diesel for electricity.
Next the aggregate total cost is considered in order to determine the demand for
total energy.

4.2. Estimation of the total cost function

Before proceeding to the estimation of the general dynamic system of share Eq.
Ž13. the aggregate price index for energy has to be generated. For this reason the
estimated long-run parameters from Ž14. are used as starting values for the energy
cost function Ž9. and then the energy cost function Ž9. is estimated using maximum
likelihood techniques. Thus, an aggregate price index Ž PˆE . is obtained which serves
as an instrumental variable for the price of energy Ž PE . in the estimation of the
dynamic system Ž13. of the shares of total cost.
The test for dynamic structure of Ž13. is shown in Table 4.
The results in Table 4 suggest that the general dynamic specification nests such
of partial adjustment as the static at the 25% level of significance while the static
specification is also nested by the general dynamic at the 10% level of significance.

Table 4
Tests of dynamic structure for the total cost share equations

␹2 Number of ␹2 0.95 ␹20.90 ␹20.75

restrtions

Partial adjustment 9.187 6 12.592 10.644 7.841

Static 12.173 7 14.067 12.017 9.037

7
This result is in accordance with the findings of a previous paper Žsee Palaskas et al., 1999a..
 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586 579

Table 5
Parameter estimates of translog total cost function for the Greek manufacturing with homogeneity and
symmetry imposed in the long-run: 1970᎐1990 a

Equation I Žcapital. Equation II Žlabour.

Parameters Coefficients Parameters Coefficients

␣K 0.652U ␣L 0.289U
Ž0.013. Ž0.010.
YKK 0.169U YLL 0.162U
Ž0.014. Ž0.021.
YKL y0.128U YLK y0.128U
Ž0.014. Ž0.014.
␦YK y0.107U ␦LY 0.051UUU
Ž0.036. Ž0.027.
␮TK 0.009U ␮LT y0.006U
Ž0.001. Ž0.001.
⌽K 0.559U ⌽L 0.559U
Ž0.141. Ž0.141.
␤KK 0.116U ␤LL 0.099U
Ž0.038. Ž0.029.
␤KL y0.080UU ␤LK y0.105U
Ž0.031. Ž0.031.
␤KY 0.012 ␤LY y0.028
Ž0.077. Ž0.059.

R2 0.962 R2 0.944
SSR 0.002 SSR 0.0009
OBS 19 OBS 19
QŽ5. 3.345 QŽ5. 5.149
QŽ10. 5.778 QŽ10. 7.766
a
The numbers in parentheses are the standard errors. U , UU , UUU Indicate statistical significance at
1%, 5% and 10%, respectively. Q denotes the Box᎐Pierce Q statistic for serial correlation in the
residuals. The figures in the parentheses are the degrees of freedom for ␹ 2 statistics. The critical values
at the 5% level are 11.070 and 18.307, respectively, for 5 and 10 d.f.s.

Parameter estimates using the IZEF method for the general dynamic specification
are presented in Table 5.
Using the parameter estimates from Ž13. and the formulas Ž15. the long-run own
and cross price elasticities for the total cost function were computed. The results
are tabulated in Table 6.
As seen from Table 6 all own point elasticities for the aggregate factors are
negative, as one would expect theoretically. However, only the capital and labour
elasticities are significant at conventional levels of statistical significance. The
common feature of these elasticities is that they are inelastic with the price of
labour more elastic than the price elasticity of capital, as would be expected, given
the gestation period required for capital investment. The estimated own demand
price elasticity for aggregate energy is not statistical different from zero. An
obvious interpretation of this result is that the demand for aggregate energy
580 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586

Table 6
Own and cross long-run price elasticity estimates a

Capital ŽK. Labour ŽL. Energy ŽE.

Capital ŽK. y0.15U Ž0.03. 0.17U Ž0.04. 0.14UU Ž0.07.

Labour ŽL. 0.13U Ž0.03. y0.19U Ž0.06. 0.02 Ž0.10.
Energy ŽE. 0.03 Ž0.02. 0.005 Ž0.03. y0.19 Ž0.17.
a
The effect of a change in the price of capital on each of the other inputs is contained in the first
row, etc. The figures in parentheses are the standard errors. U , UU denote significance at 1% and 5%,
respectively.

remains invariant to change in its price. This might be attributed to the fact that
the share of energy did not gain a dominant share in the total cost of production.
Regarding the cross price elasticities, our results strongly suggest that the
possibilities of substitution between capital, labour and energy in Greek manufac-
turing are extremely limited. This finding is also confirmed by the computed
Allen-Uzawa partial elasticities of substitution. These are ␴ KL s 0.33, ␴ KE s 0.25
and ␴LE s 0.05. It can therefore be concluded that the Greek entrepreneur is
faced with difficulties in obtaining the best combination of inputs, which minimise
total cost. For example an increase in the price of aggregate energy will not
decrease considerably the amount of energy Žthe own price elasticity of energy is
statistically zero. and as a result will not increase considerably the demand for
labour Ž ELE s 0.005. and the demand for capital Ž EKE s 0.03..
Finally to complete our analysis the total own and cross price elasticity are
calculated for each energy component Žsee Fuss, 1977..

EiYj s EiEj q M jE ⭈ EEE

Y
i , j s K,L,E. Ž 16 .

where EiYj the cross price elasticity of demand for energy component i with respect
to PE j ᎏ Y held constant; EiEj is the elasticity with energy cost ŽE. constant Žfrom
Y
Table 3.; M jE is the defined share in the energy-sub model, and EEE is the own
price elasticity of aggregate energy.
The results are presented in Table 7. It is noteworthy that these total own and
cross price elasticities take into account that a change in the price of an energy
component also causes a change in the aggregate price energy index Ž PˆE .. This
results in substitution between energy and other aggregate factors which affects the
demand for the energy component ŽFuss, 1977..
The results in Table 7 suggest that changes in the price of energy components
and to some extent in the price of aggregate energy do not affect substantially the
demand for energy component, apart from diesel. It can therefore be concluded
that in Greek manufacturing the level of substitution among energy components is
low and is associated with a low substitution of aggregate energy for other
non-energy aggregate inputs.
 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586 581

Table 7
Total energy price elasticities

Electricity ŽEL. Diesel ŽD. Crude oil ŽM.

Electricity ŽEL. y0.11 1.01 y0.18

Diesel ŽD. 0.07 y1.30 0.11
Crude oil ŽM. y0.13 0.11 y0.03

4.3. Cointegration analysis

Decisions on factors of production may be confounded by growth in manufactur-

ing itself. In other words, there is a ‘spurious regression’ issue in connection with
estimation of energy demand systems. A cointegration issue arises and the question
is, whether or not the estimated relationships are meaningful in the long-run.8
Following the cointegration approaches of Engle and Granger Ž1987. and Philips
and Ouliaris Ž1990., we have performed unit root tests on the residuals from the
demand equations for the various types of energy, that is electricity, diesel and
crude oil, and on the residuals from the demand equations for aggregate inputs, i.e.
capital, labour and energy. Following standard practice, we have used the aug-
mented Dickey᎐Fuller ŽADF. test ŽDickey and Fuller, 1981.. If the ADF test
indicates the presence of a unit root, demand system residuals are non-stationary
implying that the estimated relationships are not structural.
The results in Table 8 suggest that residuals do not contain a unit root implying
that these series are I Ž0.. Therefore, there is evidence to support that the
estimated relationships are indeed structural and not spurious.

4.4. Structural stability

Since there are several epochs of energy prices in the data, an issue of structural
stability arises. In other words, model parameters may have changed from epoch to
epoch. Full-blown Chow tests involving hypotheses about structural stability of all
parameters are impossible to implement, because of the small number of observa-
tions. One can, however, examine the structural stability of the constant term by
testing the significance of dummy variables Žone following 1973 and one following
1979. in the estimated relationships. These dummies turn out to be insignificant
and, therefore, we do not have evidence against the stability of the model Žthe
computed ␹ 2 for the sub-energy model is 11.63 and for the aggregate model 10.10,
while the critical value for 4 d.f. at the 1% level of statistical significance is 13.277.
An independent test of model stability is provided by examining the forecasting
ability of the model. If the model were subject to structural changes its forecasting
performance should deteriorate. From an inspection of Figs. 1 and 2, it turns out
that the dynamic forecasting performance of the model is excellent in the entire

8
This issue and the one in Section 4.4 was brought to my attention by an anonymous referee.
582 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586

Table 8
Unit root test a

Equation residual Augmented

Dickey᎐Fuller test

Sub-energy model
Electricity y3.197
Diesel y3.334
Crude oil y2.811

Aggregate model
Capital y5.033
Labour y3.752
Energy y3.275
a
The critical value of the ADF statistic Žwith no constant and no time trend. is y1.96 at the 5%
level. Number of lags was selected optimally using the Schwarz criterion. The ADF regression is
performed without constant term because it is known that residuals have mean zero.

sample. This provides additional evidence in favour of the model’s structural

stability

5. Concluding observations

The present paper investigates the demand for different types of energy, namely,
electricity, diesel and crude oil, and the elasticities of substitution among energy

Fig. 1. Dynamic forecasting performance: equation of capital.

 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586 583

Fig. 2. Dynamic forecasting performance: equation of labour.

components and the substitution among aggregate energy and aggregate non-en-
ergy inputs Žcapital and labour., in Greek manufacturing, for the period 1970᎐1990.
A dynamic two-stage optimisation procedure for the derived demand for each type
of energy and for aggregate energy, capital and labour is adopted. In particular, it
is assumed that an aggregate energy cost function exists that is weakly separable in
its components. Thus, we aggregated a sub-energy model in order to construct an
aggregate energy price index. In the second stage the computed instrumental
variable Ž PˆE . from this stage is substituted in the aggregate cost function in the
place of PE . In both stages the translog cost function is used under a general
dynamic specification. The dynamic specification is derived using a transformation
suggested in the error correction literature. The partial adjustment and the static
formulations are tested against the general dynamic framework. Therefore, the
dynamic specification is tested rather than arbitrarily imposed. The main character-
istic of the dynamic model is that it merges the long-run steady-state theory with
short-run time series properties of data and produces elasticities that are robust for
policy implications.
The empirical evidence can be summarised as follows:

䢇 Inter-energy substitution is limited in the case of Greek manufacturing. An

exception is the high degree of substitution of diesel for electricity. Also, our
results provide support for inelastic demand for crude oil and electricity Žtheir
computed values are close to zero. and elastic demand for diesel Ž EDD s
y1.36..
Under the hypothesis that firms minimise total cost, our findings suggest that
aggregate energy is not substitutable for aggregate capital and aggregate labour.
584 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586

Also, there is little evidence that capital and labour substitute each other in the
production process of Greek manufacturing Žthe Alien-Uzava partial elasticity of
substitution is ␴KL s 0.33.. This conclusion is also partly confirmed by a previous
paper ŽChristopoulos, 1995. where a total cost function approach was used to
estimate technological progress in Greek two-digit industry. For regardless of the
own price elasticities for aggregate inputs capital and labour those are inelastic
with the labour responsiveness to a change in its own price to be higher than the
corresponding capital responsiveness of capital. The own price elasticity for aggre-
gate energy is statistically insignificant and no conclusions can be drawn. Finally,
our total own and cross price elasticities estimates suggest that an increase in the
price of aggregate energy does not affect substantially the demand for energy
components apart from the demand for diesel. Therefore, the degree of substitu-
tion among energy components and among aggregate energy is low except for
substitution of electricity by diesel.

Acknowledgements

The author wishes to acknowledge the helpful comments of Professor Panayiotis

Reppas, Professor Clive Richardson, Dr Efthymios Tsionas and an anonymous
referee. Any remaining errors are my own.

Appendix A

The data used in this analysis consist of annual time-series data for two-digit
industry of the Greek economy employing more than 10 individuals, for the years
1970᎐1990.
Output Ž Y . is measured in value added terms. Value added in 1970 constant
prices is obtained by value added deflators. The data on value added are published
in the Annual Industrial Surveys ŽAIS. of the National Statistical Service of Greece
ŽNSSG.
VA y Ž W q S.
The price series of capital Ž PK . was calculated as PK s where
NFC
VA is the value added, W and S the wages and salaries, respectively, and NFC is
the net fixed capital. The data on wages and salaries are published in the Annual
Industrial Surveys ŽAIS. of the National Statistical Service of Greece ŽNSSG. while
the deflator was taken from the National Accounts of NSSG. The data on capital
stock for the period 1970᎐1980 were provided by Kintis Ž1986.. For the period
1981᎐1990 his approach was followed for the calculation of these data. All figures
are expressed in 1970 constant prices. Value added deflators were used to deflate
total labour compensation Žsalaries and wages. variables.
 D.K. Christopoulos r Energy Economics 22 (2000) 569᎐586 585

Following the procedure outlined by Lianos Ž1975. and Panas Ž1986. the price
W⭈L
series of labour Ž PL . was estimated by PL s where W ⭈ L is the wage bill
H
and H is the total number of hours worked by paid workers and employees. The
wage bill is expressed by means of value added deflators in 1970 constant prices.
The necessary data on hours and on the number of employees were taken from the
AIS of NSSG and from the ‘Year Book of Labour Statistics’ of the International
Labour Office, respectively.
Diesel᎐Crude Oil᎐Electricity: The prices series for the three types of energy
were calculated by dividing expenditures by consumption in physical units for each
type of energy input. The physical unit for each type of energy is expressed in
equivalent tons of oil ŽTOE. Žsee Samouilidis, 1982.. All the data are expressed in
1970 constant prices and are taken from the AIS of NSSG. The deflation was made
by value added deflators.
The annual series for the total cost was constructed as follows:
C s Value Added q Total Value of Three Types of Energy.
The NSSG did not undertake an industrial survey in 1978᎐1979. The mean of
the series was used to fill the gap for these 2 years

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