The Role of Electricity Price Shocks on the Manufacturing Sector Output and Employment Growth

Abstract

What is the role of positive electricity price shocks on the manufacturing sector output and employment growth? We find that the manufacturing sector output and employment growth decline in response to a positive shock to electricity price inflation. Prior to 2008 June the electricity price inflation increased at lower rates. We use 6.01 per cent to delineate low and high electricity price inflation regimes. Evidence shows that electricity price inflation regimes exert different effects on the manufacturing sector output and employment growth. The counterfactual results indicate that the recession in 2009 amplified the decline in the manufacturing sector output and employment growth due to positive electricity price inflation shocks. In addition, the repo rate tightening amplifies the rate of decline in the manufacturing sector output and employment growth responses to positive inflation shocks. The concurrence of high electricity price inflation alongside monetary policy tightening results in a sharper decline in the manufacturing sector output and employment growth. The policy implications are that electricity price inflation above 6 per cent matter for the manufacturing sector output and employment growth. To create a conducive environment for growth in the manufacturing sector, policy makers have to design policy interventions that stabilise electricity price inflation below 6 per cent.