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We would like to thank Davide Furceri, May Khamis, Akito Matsumoto, Masahiro Nozaki, Ian Parry, Shane Strifel, and seminar participants at the Kuwait Central Bank and the IMF’s Middle East and Central Asia Department for their valuable comments. Any errors are the authors’ responsibility.
Mr. Ribeiro da Silva currently works for the Office of the Comptroller of the Currency (OCC), but completed this paper while at the IMF. His views do not necessarily reflect those of the OCC or its policy positions.
For a number of countries, more than one weather collection point was available. In such cases, we chose the collection point in the capital of the country, or closest to the capital of the country.
This was done to avoid losing observations due to missing weather data and under the assumption that weather patterns are similar over time.
The case of unit income elasticity is appealing as an illustrative tool on several grounds. First, empirical data suggests that income elasticity should be close to one. Second, an income elasticity equal to one can be easily obtained from standard assumption on demand functions, such as when consumer preferences are assumed to be homothetic.
As noted above, nominal variables in U.S. dollars have been deflated by the U.S. CPI to obtain the equivalent variable in real terms.
Given that the main information in our dataset comes from the cross section dimension (we have 66 countries but only nine time periods), our price elasticity should be mainly interpreted as a long-term elasticity—as per the findings of Baltagi and Griffin (1984).
We assume that the country can buy/sell energy freely in the international market and that the country’s consumption decisions do not affect the international price of energy. These assumptions imply a horizontal supply curve.
Because consumers would be less able to substitute away from energy in the short term. For the case of Figure 3, a lower price elasticity would imply a steeper demand curve, which would imply higher losses for consumers: If the demand curve passes through the point PsQs, but is steeper, then the deadweight loss (dw) is smaller and the loss of consumer welfare due to an elimination of the subsidy (i.e., areas A and B) is larger.