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Abstract

This study estimates the demand for residential natural gas in the state of Illinois using an autoregressive distributed lag (ARDL) bounds testing approach based on annual data from 1970 to 2007. The ARDL bounds testing approach reveals a long-run equilibrium relationship between natural gas consumption per capita and real residential natural gas prices, real personal disposable income per capita, real residential electricity prices, real fuel oil prices, and heating degree days. Long-run elasticity estimates show that only real residential natural gas prices, real residential electricity prices, and heating degree days are statistically significant. The results from the corresponding error correction model indicate that only real residential natural gas prices and heating degree days are statistically significant. While the long-run elasticity estimates are larger than the short-run elasticity estimates, both the short-run and long-run elasticity estimates are less than one in absolute terms. Furthermore, the speed of adjustment towards long-run equilibrium is approximately 1.42 years.

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