Shahiduzzaman, Md and Alam, Khorshed (2012): A reassessment of energy and GDP relationship: A case of Australia.

PDF
MPRA_paper_36256.pdf Download (188Kb)  Preview 
Abstract
This paper investigates the longrun and shortrun relationships between energy consumption and economic growth in Australia using the bound testing and the ARDL approach. For the first time in the literature we employ both production and demand side models and a unified model comprising both production and demand side variables for a single set of data. The relationships are investigated at aggregate as well as several disaggregated energy categories, such as coal, oil, gas and electricity. The possibilities of one or more structural break(s) in the data series are examined by applying the recent advances in techniques. We find that the results of the cointegration tests could be affected by the structural break(s) in the data. It is, therefore, crucial to incorporate the information on structural break(s) in the subsequent modelling and inferences. Moreover, neither the production side nor the demand side framework alone can provide sufficient information to draw an ultimate conclusion on the cointegration and causal direction between energy and output. When alternative frameworks and structural break(s) in timeseries are explored properly, strong evidence of a bidirectional relationship between energy and output can be observed. The finding is true both at aggregate and disaggregate levels of energy consumption.
Item Type:  MPRA Paper 

Original Title:  A reassessment of energy and GDP relationship: A case of Australia 
Language:  English 
Keywords:  Energy consumption; Economic growth; Cointegration; Causality 
Subjects:  O  Economic Development, Technological Change, and Growth > O5  Economywide Country Studies > O56  Oceania O  Economic Development, Technological Change, and Growth > O1  Economic Development > O13  Agriculture; Natural Resources; Energy; Environment; Other Primary Products Q  Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4  Energy > Q43  Energy and the Macroeconomy 
Item ID:  36256 
Depositing User:  Md Shahiduzzaman 
Date Deposited:  28. Jan 2012 16:18 
Last Modified:  12. Feb 2013 14:31 
References:  ABARE 2009. Australian energy statistics, Energy update 2009, various tables, Australian Bureau of Agricultural and Resource Economics, Australian Government, Canberra. ABARES 2010. Energy in Australia, Australian Bureau of Agricultural and Resource Economics and Sciences, Australian Government Canberra. ABARES 2011. Australian Commodity Statistics, Australian Bureau of Agricultural and Resource Economics and Sciences, Australian Government Canberra. Akarca, AT & Long, T 1980. Relationship between energy and GNP: a reexamination. The Journal of Energy Development, vol. 5, no. 2, pp.32631. Akmal, M & Stern, DI, 2001, 'Residential energy demand in Australia: an application of dynamic OLS', Working papers in ecological economics, No. 0104, Centre for Resource and Environmental Studies, ANU. Altinay, G & Karagol, E 2004. Structural break, unit root, and the causality between energy consumption and GDP in Turkey. Energy Economics, vol. 26, no. 6, pp.98594. AsafuAdjaye, J 2000. The relationship between energy consumption, energy prices and economic growth: time series evidence from Asian developing countries. Energy Economics, vol. 22, no. 6, pp.61525. Berndt, E 1978. Aggregate energy, efficiency and productivity measurement Energy, vol. 3. Bowden, N & Payne, JE 2009. The causal relationship between US energy consumption and real output: A disaggregated analysis. Journal of Policy Modeling, vol. 31, no. 2, pp.1808. Bowden, N & Payne, JE 2010. Sectoral analysis of the causal relationship between renewable and nonrenewable energy consumption and real output in the US. Energy Sources, Part B: Economics, Planning, and Policy, vol. 5, no. 4, pp.4008. ChiouWei, S, Chen, C & Zhu, Z 2008. Economic growth and energy consumption revisited—Evidence from linear and nonlinear Granger causality. Energy Economics, vol. 30, no. 6, pp.306376. Cleveland, CJ, Kaufmann, RK & Stern, DI 2000. Aggregation and the role of energy in the economy. Ecological Economics, vol. 32, no. 2, pp.30117. Climent, F & Pardo, A 2007. Decoupling factors on the energyoutput linkage: The Spanish case. Energy Policy, vol. 35, no. 1, pp.5228. Dickey, D & Fuller, W 1979. Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, vol. 74, no. 366, pp.42731. Dickey, D & Fuller, W 1981. Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica: Journal of the Econometric Society, vol. 49, no. 4, pp.105772. ECRI 2011. Business Cycle Peak and Trough Dates, Economic Cycle Research Institute (ECRI), New York, London. Enders, W 2004. Applied econometric time series. 2nd edn, John Wiley & Sons (ASIA) Pte Ltd. Esso, LJ 2010. Threshold cointegration and causality relationship between energy use and growth in seven African countries. Energy Economics, vol. 32, no. 6, pp.138391. Fatai, K, Oxley, L & Scrimgeour, FG 2004. Modelling the causal relationship between energy consumption and GDP in New Zealand, Australia, India, Indonesia, The Philippines and Thailand. Mathematics and Computers in Simulation, vol. 64, no. 34, pp.43145. Fosu, OAE & Magnus, FJ 2006. Bounds Testing Approach to Cointegration:An Examination of Foreign Direct Investment Trade and Growth Relationships. American Journal of Applied Sciences vol. 3 no. 11, pp.207985. Ghali, K & ElSakka, M 2004. Energy use and output growth in Canada: a multivariate cointegration analysis. Energy Economics, vol. 26, no. 2, pp.22538. Gregory, AW & Hansen, BE 1996a. Tests for Cointegration in Models with Regime and Trend Shifts. Oxford Bulletin of Economics and statistics, vol. 58, no. 3, pp.55560. Gregory, AW & Hansen, BE 1996b. Residualbased tests for cointegration in models with regime shifts. Journal of Econometrics, vol. 70, no. 1, pp.99126. Hansen, BE & Seo, B 2002. Testing for tworegime threshold cointegration in vector errorcorrection models. Journal of Econometrics, vol. 110, no. 2, pp.293318. Hsiao, C 1981. Autoregressive modelling and moneyincome causality detection. Journal of Monetary Economics, vol. 7, no. 1, pp.85106. Hu, JL & Lin, CH 2008. Disaggregated energy consumption and GDP in Taiwan: a threshold cointegration analysis. Energy Economics, vol. 30, no. 5, pp.234258. Jin, JC, Choi, J & Yu, E 2009. Energy prices, energy conservation, and economic growth: Evidence from the postwar United States. International Review of Economics & Finance, vol. 18, no. 4, pp.6919. Johansen, S 1991. Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica: Journal of the Econometric Society, pp.155180. Johansen, S 1995. Likelihoodbased inference in cointegrated vector autoregressive models. Oxford University Press. Karanfil, F 2009. How many times again will we examine the energyincome nexus using a limited range of traditional econometric tools? Energy Policy, vol. 37, no. 4, pp.11914. Kraft, J & Kraft, A 1978. On the relationship between energy and GNP. Journal of Energy and Development, vol. 3, no. 2, pp.4013. Kwiatkowski, D, Phillips, PCB, Schmidt, P & Shin, Y 1992. Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, vol. 54, pp.15978. Lee, C & Chang, C 2005. Structural breaks, energy consumption, and economic growth revisited: Evidence from Taiwan. Energy Economics, vol. 27, no. 6, pp.85772. Lee, J & Strazicich, M 2003. Minimum Lagrange multiplier unit root test with two structural breaks. Review of Economics and Statistics, vol. 85, no. 4, pp.10829. Levent, K 2007. Testing causal relationships between energy consumption, real income and prices: evidence from Turkey. MPRA Paper. Lütkepohl, H 1993. Introduction to multiple time series analysis. SpringerVerlag. Maddala, G & Kim, I 1998. Unit roots, cointegration, and structural change. Cambridge University Press. Mahadevan, R & AsafuAdjaye, J 2007. Energy consumption, economic growth and prices: A reassessment using panel VECM for developed and developing countries. Energy Policy, vol. 35, no. 4, pp.248190. Masih, AMM & Masih, R 1998. A multivariate cointegrated modelling approach in testing temporal causality between energy consumption, real income and prices with an application to two Asian LDCs. Applied Economics, vol. 30, no. 10, pp.128798. Maslyuk, S & Smyth, R 2008. Unit root properties of crude oil spot and futures prices. Energy Policy, vol. 36, no. 7, pp.2591600. Narayan, P 2005. The saving and investment nexus for China: evidence from cointegration tests. Applied Economics, vol. 37, no. 17, pp.197990. Narayan, P & Smyth, R 2005a. Electricity consumption, employment and real income in Australia evidence from multivariate Granger causality tests. Energy Policy, vol. 33, no. 9, pp.110916. Narayan, P & Smyth, R 2005b. Structural breaks and unit roots in Australian macroeconomic time series. Pacific Economic Review, vol. 10, no. 4, pp.42137. Narayan, P & Smyth, R 2005c. The residential demand for electricity in Australia: an application of the bounds testing approach to cointegration. Energy Policy, vol. 33, no. 4, pp.46774. Narayan, P, Narayan, S & Popp, S 2010. Energy consumption at the state level: The unit root null hypothesis from Australia. Applied Energy, vol. 87, no. 6, pp.195362. Narayan, S & Narayan, P 2005. An empirical analysis of Fiji's import demand function. Journal of Economic Studies, vol. 32, pp.15868. Nelson, CR & Plosser, CR 1982. Trends and random walks in macroeconmic time series : Some evidence and implications. Journal of Monetary Economics, vol. 10, no. 2, pp.13962. Oh, W & Lee, K 2004. Energy consumption and economic growth in Korea: testing the causality relation. Journal of Policy Modeling, vol. 26, no. 89, pp.97381. Ozturk, I 2010. A literature survey on energygrowth nexus. Energy Policy, vol. 38, no. 1, pp.3409. Payne, JE 2009. On the dynamics of energy consumption and output in the US. Applied Energy, vol. 86, no. 4, pp.5757. Payne, JE 2010a. Survey of the international evidence on the causal relationship between energy consumption and growth. Journal of Economic Studies, vol. 37, no. 1, pp.5395. Payne, JE 2010b. A survey of the electricity consumptiongrowth literature. Applied Energy, vol. 87, no. 3, pp.72331. Payne, JE 2010c. On biomass energy consumption and real output in the US. Energy Sources, Part B: Economics, Planning, and Policy, vol. 6, no. 1, pp.4752. Payne, JE 2011. US disaggregate fossil fuel consumption and real GDP: an empirical note. Energy Sources, Part B: Economics, Planning, and Policy, vol. 6, no. 1, pp.638. Payne, JE & Taylor, JP 2010. Nuclear energy consumption and economic growth in the US: an empirical note. Energy Sources, Part B: Economics, Planning, and Policy, vol. 5, no. 3, pp.3017. Perron, P 1989. The great crash, the oil price shock, and the unit root hypothesis. Econometrica: Journal of the Econometric Society, vol. 57, no. 6, pp.1361401. Perron, P 1997. Further evidence on breaking trend functions in macroeconomic variables. Journal of Econometrics, vol. 80, no. 2, pp.35585. Pesaran, H & Shin, Y 1999, 'An autoregressive distributedlag modelling approach to cointegration analysis', in S Strøm (ed.), Econometrics and Economic Theory in the 20th Century, Cambridge University Press, Chapter 11., pp. 371413. Pesaran, M, Shin, Y & Smith, R 2001. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, vol. 16, no. 3, pp.289326. Pesaran, MH & Pesaran, B 1997. Working with Microfit 4.0: Interactive econometric analysis. Oxford University Press. Phillips, P & Perron, P 1988. Testing for a unit root in time series regression. Biometrika, vol. 75, no. 2, p.335. Sari, R, Ewing, B & Soytas, U 2008. The relationship between disaggregate energy consumption and industrial production in the United States: An ARDL approach. Energy Economics, vol. 30, no. 5, pp.230213. Soytas, U & Sari, R 2007. The relationship between energy and production: evidence from Turkish manufacturing industry. Energy Economics, vol. 29, no. 6, pp.115165. Squalli, J 2007. Electricity consumption and economic growth: Bounds and causality analyses of OPEC members. Energy Economics, vol. 29, no. 6, pp.1192205. Stern, DI 1993. Energy and economic growth in the USA : A multivariate approach. Energy Economics, vol. 15, no. 2, pp.13750. Stern, DI 2000. A multivariate cointegration analysis of the role of energy in the US macroeconomy. Energy Economics, vol. 22, pp.26783. Stern, DI 2011. The role of energy in economic growth. Annals of the New York Academy of Sciences, vol. 1219, no. 1, pp.2651. Toda, HY & Yamamoto, T 1995. Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, vol. 66, no. 12, pp.22550. Warr, BS & Ayres, RU 2010. Evidence of causality between the quantity and quality of energy consumption and economic growth. Energy, vol. 35, no. 4, pp.168893. Yuan, J, Kang, J, Zhao, C & Hu, Z 2008. Energy consumption and economic growth: Evidence from China at both aggregated and disaggregated levels. Energy Economics, vol. 30, no. 6, pp.307794. Zivot, E & Andrews, D 1992. Further evidence on the great crash, the oilprice shock, and the unitroot hypothesis. Journal of Business and Economic Statistics, vol. 10, no. 3, pp.25170. 
URI:  http://mpra.ub.unimuenchen.de/id/eprint/36256 