fall in oil prices, global growth increases by 0.16–0.37 percentage points in the medium term, where the global growth effects are computed by aggregating individual country responses.

The relationship between energy efficiency and economic activity has also been of considerable interest to scholars and policymakers, especially after the two oil price shocks of the 1970s. However, most macroeconomic research has focused on the relationship between energy efficiency and long-term economic growth. The impact of environmental policies such as investments in energy efficiency programs on short-term economic fluctuations has been less studied. More recently, researchers have stressed the effects of environmental policies on business cycle fluctuations and vice versa. A few studies use a real business cycle (RBC) model to compare how different environmental policies interact with short-run fluctuations (see, amongst others, Angelopoulos et al., 2010; Fischer & Springborn, 2011; Heutel, 2012). For example, Angelopoulos et al. (2010) incorporate pollution emissions as a by-product of production and compare the performance of three different environmental policies (namely, a tax, a cap, and Kyoto-like rules) in the presence of productivity shocks.<sup>6</sup> Annicchiarico & Di Dio (2015) do a similar comparison but expand the analysis by adding nominal frictions and monetary policy shocks using a New Keynesian (NK) model. Xiao, Fan, & Guo (2018) extend the framework of Annicchiarico & Di Dio (2015) by embedding energy efficiency shocks, which are assumed to follow an AR(1) process. An improvement in energy efficiency would imply an increase in the marginal product of the energy input. Their results indicate that a positive energy efficiency shock would lead to an increase in output, consumption, investment, real wage, and the capital stock. Moreover, an energy efficiency enhancement also results in an increase in energy use, which is known as the “rebound effect”.

A few empirical studies have investigated the macroeconomic effects of changes in energy efficiency.<sup>7</sup> Two notable exceptions are Rajbhandari & Zhang (2018) and Bruns, Moneta, & Stern (2021). Rajbhandari & Zhang (2018) use a panel VAR model to examine the relationship between energy efficiency and economic growth for 56 high- and middle-income economies. A particular advantage of analyzing energy efficiency in this framework is that it allows for an economy-wide assessment of the impact of energy efficiency improvements. However, Rajbhandari & Zhang (2018) confine the interpretation of causality to Granger’s sense. Bruns et al. (2021), on the other hand, estimate a three-variable structural VAR model for the United States with energy consumption, energy price, and GDP data to evaluate the impact of energy efficiency shocks on U.S. macroeconomic aggregates and energy price. The identification of energy efficiency shocks is based on a lower triangular ordering of the variables (Cholesky factorization).

> 6In Angelopoulos et al. (2010), “Kyoto-like rules” are defined as how fast pollution decreases from one period to the next.

> 7The macroeconomic linkages between total energy consumption and economic growth have been studied extensively using vector autoregression (VAR) models in the empirical literature.

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