Residential Natural Gas Demand Elasticities in OECD Countries: An ARDL Bounds Testing Approach

FCN Working Paper No. 15/2011

29 Pages Posted: 5 Jun 2012

See all articles by Ronald Bernstein

Ronald Bernstein

RWTH Aachen University - E.ON Energy Research Center

Reinhard Madlener

RWTH Aachen University

Date Written: October 1, 2011

Abstract

In this paper we analyze residential natural gas demand in twelve OECD countries using time series data from 1980 to 2008. We estimate long-run demand elasticities with regard to real disposable income and real residential price of natural gas using the autoregressive distributed lag (ARDL) bounds testing procedure (Pesaran and Shin, 1999). The robustness of the long-run estimates is checked by additionally considering the FMOLS and DOLS estimators. By employing an error correction framework we also obtain estimates for the speeds of adjustment to long-run equilibrium and short-run elasticities for the individual countries. The effect of weather conditions on natural gas demand in a given year is accounted for by including heating degree days as a control variable. On average, the long-run elasticities are 0.94 with regard to income, –0.51 with regard to price and 1.35 with regard to weather. The short-run dynamics assessed by estimation of the error correction models indicate an average adjustment coefficient of –0.58, a short-run income elasticity of 0.45, a short-run price elasticity of –0.24, and a short-run weather elasticity of 0.72. Hence, on average, the short-run elasticities are approximately half in magnitude compared to their long-run counterparts.

Keywords: Natural gas demand, Elasticities, ARDL, Bounds testing, OECD countries, Residential

JEL Classification: Q41, Q43

Suggested Citation

Bernstein, Ronald and Madlener, Reinhard, Residential Natural Gas Demand Elasticities in OECD Countries: An ARDL Bounds Testing Approach (October 1, 2011). FCN Working Paper No. 15/2011 . Available at SSRN: https://ssrn.com/abstract=2078036 or http://dx.doi.org/10.2139/ssrn.2078036

Ronald Bernstein

RWTH Aachen University - E.ON Energy Research Center ( email )

Mathieustrasse 6
Aachen, 52074
Germany

Reinhard Madlener (Contact Author)

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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