Tying up loose ends: A note on the impact of omitting MA residuals from panel energy demand models based on the Koyck lag transformation

Energy demand functions based on Koyck lag transformation result in an MA error process that is generally ignored in estimated panel data models. This note explores the implications of this assumption by estimating panel energy demand functions with asymmetric price responses and an MA process modelled explicitly. It is found that although the models with an MA term might be preferred statistically, they result in inferential problems implying that there might be a need to revisit the specification of panel energy demand functions used in a number of previous studies.