Energy policy extensions of KLE based macroeconomic models

Abstract Aiming at the enhancement of the energy analysis capabilities of macroeconomic models, this paper analyzes the issue arising from the linkage of an economic model with KLE (or KLEM) production function and an energy model with process analysis details and an explicit treatment of engineering aspects. The problem concerns: a) the replacement of the derived energy demand equation of the KLE block in the macroeconomic model with the estimation inherent in the energy one, b) the use of the detailed energy price formation mechanism coming from the energy model. The issue is treated both in a theoretical and an empirical context. The former is related to the construction of an aggregate core macroeconomic model which is solved analytically to derive the sufficient conditions under which its simulation properties remain unaltered when the energy demand equation is replaced. The latter concerns the linkage and the use of two large-scale European models, namely the macroeconomic HERMES and the enrgy MIDAS models.