Measuring the Impact of Non-economic Exogenous Factors on Industrial Energy Demand in Iran

This paper tries to demonstrate the importance of non-economic exogenous factors (Underlying Energy Demand Trend) when we estimate the industrial energy demand for Iran. The Structural Time Series Model (STSM) approach is used to model these unobservable factors. The Kalman filter and Maximum Likelihood methods allow us to estimate the value of the UEDT. This approach enables us to obtain more reliable estimates of income and price elasticity as well.  We use the derived values of UEDT, and price and income elasticities to evaluate the impact of economic and non-economic exogenous factors on industrial energy demand. The results show that the UEDT has a positive trend and the industrial sector has become more energy intensive over time.  The results further indicate that technological improvement and other non-economic exogenous factors have no impact on energy efficiency in the Iranian industrial sector. Our model estimated short run income and price elasticity as respectively 0.33 and 0.08. The UEDT has a great impact on energy demand change over the time spam (1353-1391).  This impact is greater than that of the income and price impacts.  We also observe that demand for energy in the industrial sector is more sensitive to the level of activities (value added) than price.