Consumer preferences, technological change, and the short-run income elasticity of metal demand

Metal demand over the short run is widely thought to be elastic with respec t to income (GDP), since metals are largely consumed in construction and ot her economic sectors whose output fluctuates greatly over the business cycl e. Yet efforts to estimate metal demand functions typically find that the s hort-run income elasticity of metal demand is less than one. This article e xamines a possible explanation for this inconsistency. In particular, it su ggests the empirical analyses are deficient in that they fail to take accou nt of changing technology and consumer preferences. This omission, it argue s, causes the estimates for the income elasticity of metal demand for the d eveloped countries, which account for most of the world's metal consumption , to be severely underestimated. For the developing countries, the resultin g omitted variable bias, if negative, is expected to be less severe, and ma y even be positive. When time is used in a partial adjustment model as a pr oxy for changes in consumer preferences and in technology, the findings for six metals over the 1963-92 period are consistent with these expectations. (C) 1999 Published by Elsevier Science Ltd. All rights reserved.