The macrodynamics of energy shocks,short- and long-run

Short-run and long-run energy–economy interactions are fundamentally different. Yet the long run is reached only through the short run, and is determined by it. This paper shows how the two may be happily married while preserving the differences. Optimal growth theory provides the long-run framework, but it is here extended to include energy as a factor of production. Traditional aggregate supply/aggregate demand analysis provides the short-run framework. The bridge between the two is investment. How the short run becomes the long run is illustrated by a simulation model of the OECD economy as it responds to a shock.