Stock-Watson dynamic OLS (DOLS) and error-correction modelling approaches to estimating long- and short-run elasticities in a demand function: new evidence and methodological implications from an application to the demand for coal in mainland China
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In this paper robust elasticity estimates of coal demand for China are derived using annual data 1953-92. In so doing, we illustrate the use of a powerful yet practically convenient and recently developed modelling procedure devised by Stock and Watson (known as Dynamic OLS (DOLS)), who provide evidence, based on Monte Carlo simulations, of this estimator being superior in small samples compared to a number of alternative estimators, as well as being able not only to accommodate higher orders of integration but also to account for possible simultaneity within regressors of a potential demand system. Furthermore, cointegration and error-correction methods are employed to derive short-run price and income elasticities. Estimated results are quite robust not only in terms of statistical prowess but also in terms of economic intuition and indicate that, over the long run, both price and income elasticities are close to unity. While short-run price and income elasticities are less (in absolute value) than their long-run counterparts, there seems to be some divergence in short-run parameters from a subsample analysis. Overall, results seem to imply that for China, coal consumption should remain relatively constant as future modernization strategies for economic development are pursued. In addition, the study has clear methodological implications for estimating the long- and short-run elasticities in a demand function in general, and in a wide variety of fields in future applied research.
China , Coal/energy consumption , Short-/long-run elasticities , Price , Income , Dynamic OLS
Masih, Rumi and Mohammed Masih, Abul Mansur. (1996). Stock-Watson dynamic OLS (DOLS) and error-correction modelling approaches to estimating long- and short-run elasticities in a demand function: new evidence and methodological implications from an application to the demand for coal in mainland China. Energy Economics, 18, pp. 315-334.
Elsevier Science B.V.