Causality and Cointegration between Economic Growth and Energy Consumption: Econometric Evidence from Jordan

Shahateet, Mohammed Issa and Al-Majali, Khalid Ali and Al-Hahabashneh, Fedel (2014): Causality and Cointegration between Economic Growth and Energy Consumption: Econometric Evidence from Jordan. Published in: International Journal of Economics and Finance , Vol. 6, No. 10 (October 2014): pp. 270-279.

Abstract

This paper aims at determining the relationship between economic growth and energy consumption in Jordan within the neo-classical productivity theory framework where capital, labour and energy are treated as separate production factors. It constructs an econometric model using annual time series data covering the period 1970– 2011. After estimating the parameters of the model, it uses causality tests to examine the existence and direction of causality between output growth and production factors including energy consumption. Empirical findings suggest that there exists Granger causality running from GDP to energy consumption, but there is no Granger causality running from energy consumption to GDP. The implication being that energy supply constraints could be introduced with little or no impact on economic growth. This unidirectional causality provides empirical evidence that Jordan is a less energy-dependent economy. Such findings undermine the theory of energy conservation policies and support the Government policies that aim at raising the prices of energy and reducing public demand for energy consumption mainly to reduce the deficit of government budget, foreign debt, and its services.

• Item Type: MPRA Paper
• Language: English
• Keywords: C33; O4; O13; Q43
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C54 - Quantitative Policy Modeling

References

Abbasian, E., Nazari, M., Nasrindoost, M. (2010). Energy consumption and economic growth in the Iranian economy: Testing the causality relationship. Middle-East Journal of Scientific Research, 5, 374–381.

Acaravci, A., & Ozturk, I. (2012). Electricity consumption and economic growth nexus: A multivariate analysis for Turkey. Amfiteatru Economic, 14, 246–257.

Adom, P. K. (2011). Electricity consumption-economic growth nexus: The Ghanaian case. International Journal of Energy Economics and Policy, 1, 18–31. Akinlo, A. E. (2009). Electricity consumption and economic growth in Nigeria: Evidence from cointegration and co-feature analysis. Journal of Policy Modeling, 31, 681–693. http://dx.doi.org/10.1016/j.jpolmod.2009.03.004

Al-Iriani, M. A. (2006). Energy–GDP relationship revisited: An example from GCC countries using panel causality. Energy Policy, 34, 3342–3350. http://dx.doi.org/10.1016/j.enpol.2005.07.005

Ang, J. B. (2007). CO2 emissions, energy consumption, and output in France. Energy Policy, 35, 4772–4778. http://dx.doi.org/10.1016/j.enpol.2007.03.032 Apergis, N., & Payne, J. (2009a). CO2 emissions, energy usage, and output in Central America. Energy Policy, 37, 3282–3286. http://dx.doi.org/10.1016/j.enpol.2009.03.048

Apergis, N., & Payne, J. (2009b). Energy consumption and economic growth in Central America: Evidence from a panel cointegration and error correction model. Energy Economics, 31, 211–216. http://dx.doi.org/10.1016/j.eneco.2008.09.002

Apergis, N., & Payne, J. (2009c). Energy consumption and economic growth: Evidence from the Common wealth of Independent States. Energy Economics, 31, 641–647. http://dx.doi.org/10.1016/j.eneco.2009.01.011

Azlina, A. A. (2012). Energy consumption and economic development in Malaysia: A multivariate cointegration analysis. Procedia-Social and Behavioral Sciences, 65, 674–681. http://dx.doi.org/10.1016/j.sbspro.2012.11.183

Baranzini, A., Weber, S., Bareit, M., & Mathys, N. A. (2013). The causal relationship between energy use and economic growth in Switzerland. Energy Economics, 36, 464–470. http://dx.doi.org/10.1016/j.eneco.2012.09.015

Bélaïd, F., & Abderrahmani, F. (2013). Electricity consumption and economic growth in Algeria: A multivariate causality analysis in the presence of structural change. Energy Policy, 55, 286–295. http://dx.doi.org/10.1016/j.enpol.2012.12.004

Belloumi, M. (2009). Energy consumption and GDP in Tunisia: Cointegration and causality analysis. Energy Policy, 37, 2745–2753. http://dx.doi.org/10.1016/j.enpol.2009.03.027

Bowden, N., & Payne, J. (2009). The causal relationship between U.S. energy consumption and real output: A disaggregated analysis. Journal of Policy Modeling, 31, 180–188. http://dx.doi.org/10.1016/j.jpolmod.2008.09.001

Central Bank of Jordan. (2012). Annual Report, No. 49, Central Bank of Jordan, Amman.

Chandran, V. G. R., Sharma, S., & Madhavan, K. (2010). Electricity consumption-growth nexus: The case of Malaysia. Energy Policy, 38, 606–612. http://dx.doi.org/10.1016/j.enpol.2009.10.013

Chang, C. C. (2010). A multivariate causality test of carbon dioxide emissions, energy consumption and economic growth in China. Applied Energy, 87, 3533–3537. http://dx.doi.org/10.1016/j.apenergy.2010.05.004

Chang, C. C., & Soruco, C. C. F. (2011). Energy conservation and sustainable economic growth: The case of Latin America and the Caribbean. Energy Policy, 39, 4215–4221. http://dx.doi.org/10.1016/j.enpol.2011.04.035

Chen, S. T., Kou, H. I., & Chen, C. C. (2007). The relationship between GDP and electricity consumption in 10 Asian Countries. Energy Policy, 35, 2611–2621. http://dx.doi.org/10.1016/j.enpol.2006.10.001

Chiou-Wei, S. Z., Chin, C., & Zhu, Z. (2008). Economic growth and energy consumption revisited-evidence from linear and nonlinear granger causality. Energy Economics, 30, 3063–3076. http://dx.doi.org/10.1016/j.eneco.2008.02.002 Damette, O., & Seghir, M. (2013). Energy as a driver of growth in oil exporting countries? Energy Economics, 37, 193–199. http://dx.doi.org/10.1016/j.eneco.2012.12.011

Erdal, G., Erdal, H., & Esengun, K. (2008). The causality between energy consumption and economic growth in Turkey. Energy Policy, 36(10), 3838–3842. http://dx.doi.org/10.1016/j.enpol.2008.07.012

Fatai, K., Oxley, L., & Scrimgeour, F. G. (2004). Modelling the causal relationship between energy consumption and GDP in New Zealand, Australia, India, Indonesia, the Phillippines and Thailand. Mathematics and Computers in Simulation, 64, 431–445. http://dx.doi.org/10.1016/S0378-4754(03)00109-5

Ghali, K. H., & El-Sakka, M. I. T. (2004). Energy consumption and output growth in Canada: A multivariate cointegration analysis. Energy Economics, 26, 225–238. http://dx.doi.org/10.1016/S0140-9883(03)00056-2

Haghnejad, A., & Dehnavi, J. (2012). Energy consumption, economic growth, and pollution in selected OPEC countries: Testing the environmental Kuznets curve hypothesis. Journal of Academic Research in Economics, 2, 149–166.

Halicioglu, F. (2009). An econometric study of CO2 emissions, energy consumption, income and foreign trade in Turkey. Energy Policy, 37, 1156–1164. http://dx.doi.org/10.1016/j.enpol.2008.11.012

Hatemi-J, A., & Irandoust, M. (2005). Energy consumption and economic growth in Sweden: A leveraged bootstrap approach (1965–2000). International Journal of Applied Econometrics and Quantitative Studies, 2, 87–98.

Ho, C., & Siu, K. W. (2007). A dynamic equilibrium of electricity consumption and GDP in Hong Kong: An empirical investigation. Energy Policy, 35, 2507–2513. http://dx.doi.org/10.1016/j.enpol.2006.09.018

Hu, X., & Lin, X. (2013). A study of the relationship between electricity consumption and GDP growth in Hainan international tourism island of China. Research in World Economy, 4, 109–115. http://dx.doi.org/10.5430/rwe.v4n1p109

Inglesi-Lotz, R., & Pouris, A. (2013). On the causality and determinants of energy and electricity demand in South Africa: A review. Department of Economics Working Paper Series, University of Pretoria, Working Paper: 2013–14.

Jamil, F., & Ahmad, E. (2010). The relationship between electricity consumption, electricity prices and GDP in Pakistan. Energy Policy, 38, 6016–6025. http://dx.doi.org/10.1016/j.enpol.2010.05.057 Javid, A. Y, Javid, M., & Awan, Z. A. (2013). Electricity consumption and economic growth: Evidence from Pakistan. Economics and Business Letters, 2, 21–32.

Jobert, T., & Karanfil, F. (2007). Sectoral energy consumption by source and economic growth in Turkey. Energy Policy, 35, 5447–5456. http://dx.doi.org/10.1016/j.enpol.2007.05.008

Jumbe, C. B. L. (2004). Cointegration and causality between electricity consumption and GDP: Empirical evidence from Malawi. Energy Economics, 26, 61–68. http://dx.doi.org/10.1016/S0140-9883(03)00058-6

Khan, M. A., & Qayyum, A. (2009). The demand for electricity in Pakistan. OPEC Energy Review, March, 70– 96. http://dx.doi.org/10.1111/j.1753-0237.2009.00158.x

Kouakou, A. K. (2011). Economic growth and electricity consumption in Cote d'Ivoire: Evidence from time series analysis. Energy Policy, 39, 3638–3644. http://dx.doi.org/10.1016/j.enpol.2011.03.069

Lee, C., & Chang, C. (2007). Energy consumption and GDP revisited: A panel analysis of developed and developing countries. Energy Economics, 29, 1206–1223. http://dx.doi.org/10.1016/j.eneco.2007.01.001

Lee, C., Chang, C., & Chen, P. (2008). Energy-income causality in OECD countries revisited: The key role of capital stock. Energy Economics, 30, 2359–2373. http://dx.doi.org/10.1016/j.eneco.2008.01.005 Lee, C. C. (2005). Energy consumption and GDP in developing countries: A cointegrated panel analysis. Energy Economics, 27, 415–427. http://dx.doi.org/10.1016/j.eneco.2005.03.003

Lee, C. C. (2006). The causality relationship between energy consumption and GDP in G-11 countries revisited. Energy Policy, 34, 1086–1093. http://dx.doi.org/10.1016/j.enpol.2005.04.023 Lee, C. C., & Chang, C. P. (2005). Structural breaks, energy consumption, and economic growth revisited: Evidence from Taiwan. Energy Economics, 27, 857–872. http://dx.doi.org/10.1016/j.eneco.2005.08.003

Lee, C. C., & Chang, C. P. (2008). Energy consumption and economic growth in Asian economies: A more comprehensive analysis using panel data. Resource and Energy Economics, 30, 50–65. http://dx.doi.org/10.1016/j.reseneeco.2007.03.003

MacKinnon, J. G., Haug, A. A., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14, 563–577. http://dx.doi.org/10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-R

Mahadevan, R., & Asafu-Adjaye, J. (2007). Energy consumption, economic growth and prices: A reassessment using panel VECM for developed and developing countries. Energy Policy, 35, 2481–2490. http://dx.doi.org/10.1016/j.enpol.2006.08.019

Mazbahul, G. A., & Nazrul, A. K. M. (2011). Electricity consumption and economic growth nexus in Bangladesh: Revisited evidences. Energy Policy, 39, 6145–6150. http://dx.doi.org/10.1016/j.enpol.2011.07.014 Mehrara, M. (2007). Energy Consumption and Economic Growth: The Case of Oil Exporting Countries. Energy Policy, 35, 2939–2945. http://dx.doi.org/10.1016/j.enpol.2006.10.018

Morimoto, R., & Hope, C. (2004). The impact of electricity supply on economic growth in Sri Lanka. Energy Economics, 26, 77–85. http://dx.doi.org/10.1016/S0140-9883(03)00034-3

Mozumder, P., & Marathe, A. (2007). Causality relationship between electricity consumption and GDP in Bangladesh. Energy Policy, 35, 395–402. http://dx.doi.org/10.1016/j.enpol.2005.11.033

Narayan, P. K., & Smyth, R. (2005). Electricity consumption, employment and real income in Australia: Evidence from multivariate Granger causality tests. Energy Policy, 33, 1109–1116. http://dx.doi.org/10.1016/j.enpol.2003.11.010

Narayan, P. K., & Smyth, R. (2008). Energy consumption and real GDP in G7 countries: New evidence from panel cointegration with structural breaks. Energy Economics, 30, 2331–2341. http://dx.doi.org/10.1016/j.eneco.2007.10.006 National Electric Power Company. (2012). Annual Report 2011, National Electric Power Company, Amman.

Odhiambo, N. (2009a). Energy consumption and economic growth nexus in Tanzania: An ARDL bounds testing approach. Energy Policy, 37, 617– 622. http://dx.doi.org/10.1016/j.enpol.2008.09.077

Odhiambo, N. (2009b). Electricity consumption and economic growth in South Africa: A trivariate causality test. Energy Economics, 31, 635–640. http://dx.doi.org/10.1016/j.eneco.2009.01.005

Odhiambo, N. (2010). Energy consumption, prices and economic growth in three SSA countries: A comparative study. Energy Policy, 38, 2463–2469. http://dx.doi.org/10.1016/j.enpol.2009.12.040

Oh, W., & Lee, K. (2004a). Causal relationship between energy consumption and GDP revisited: The case of Korea 1970–1999. Energy Economics, 26, 51–59. http://dx.doi.org/10.1016/S0140-9883(03)00030-6

Oh, W., & Lee, K. (2004b). Energy consumption and economic growth in Korea: Testing the causality relation. Journal of Policy Modeling, 26, 973–981. http://dx.doi.org/10.1016/j.jpolmod.2004.06.003

Ouédraogo, I. (2010). Electricity consumption and economic growth in Burkina Faso: A cointegration analysis. Energy Economics, 32, 524–531. http://dx.doi.org/10.1016/j.eneco.2009.08.011 Ouedraogo, N. S. (2013). Energy consumption and economic growth: Evidence from the economic community of West African States (ECOWAS). Energy Economics, 36, 637–647. http://dx.doi.org/10.1016/j.eneco.2012.11.011

Ozturk, I., & Acaravci, A. (2010). The Causal Relationship between Energy Consumption and GDP in Albania,Bulgaria, Hungary and Romania: Evidence from ARDL Bound Testing Approach. Applied Energy, 87, 1938–1943. http://dx.doi.org/10.1016/j.apenergy.(2009).10.010.

Ozturk, I., & Acaravci, A. (2011). Electricity consumption and real GDP causality nexus: Evidence from ARDL bounds testing approach for 11 MENA countries. Applied Energy, 88, 2885–2892. http://dx.doi.org/10.1016/j.apenergy.2011.01.065

Paul, S., & Bhattacharya, R. N. (2004). Causality between energy consumption and economic growth in India: A note on conflicting results. Energy Economics, 26, 977–983. http://dx.doi.org/10.1016/j.eneco.2004.07.002

Shahbaz, M., & Lean, H. H. (2012). The dynamics of electricity consumption and economic growth: A revisit study of their causality in Pakistan. Energy, 39, 146–153. http://dx.doi.org/10.1016/j.energy.2012.01.048

Shahiduzzaman, M., & Alam, K. (2012). Cointegration and causal relationships between energy consumption and output: Assessing the evidence from Australia. Energy Economics, 34, 2182–2188. http://dx.doi.org/10.1016/j.eneco.2012.03.006

Shiu, A., & Lam, P. (2004). Electricity consumption and economic growth in China. Energy Policy, 32, 47–54. http://dx.doi.org/10.1016/S0301-4215(02)00250-1

Solarin, S. A., & Shahbaz, M. (2013). Trivariate causality between economic growth, urbanisation and electricity consumption in Angola: Cointegration and causality analysis. MPRA Paper No. 45580. Retrieved from http://mpra.ub.uni-muenchen.de/45580/

Soytas, U., & Sari, R. (2003). Energy consumption and GDP: Causality relationship in G7 countries and emerging markets. Energy Economics, 25, 33–37. http://dx.doi.org/10.1016/S0140-9883(02)00009-9 Soytas, U., & Sari, R. (2006a). Can China contribute more to the fight against global warming? Journal of Policy Modelling, 28, 837–846. http://dx.doi.org/10.1016/j.jpolmod.2006.06.016

Soytas, U., & Sari, R. (2006b). Energy consumption and income in G-7 countries. Journal of Policy Modelling, 28, 739–750. http://dx.doi.org/10.1016/j.jpolmod.2006.02.003

Soytas, U., & Sari, R. (2009). Energy consumption, economic growth, and carbon emissions: Challenges faced by an EU candidate member. Ecological Economics, 68(6), 1667–1675. http://dx.doi.org/10.1016/j.ecolecon.2007.06.014

Squalli, J. (2007). Electricity consumption and economic growth: Bounds and causality analyses of OPEC Members. Energy Economics, 29, 1192–1205. http://dx.doi.org/10.1016/j.eneco.2006.10.001 Stern, D. I., & Enflo, K. (2013). Causality between energy and output in the long-run. Lund Papers in Economic History, 126.

Tang, C. F., & Tan, E. C. (2013). Exploring the nexus of electricity consumption, economic growth, energy prices and technology innovation in Malaysia. Applied Energy, 104, 297–305. http://dx.doi.org/10.1016/j.apenergy.2012.10.061

Tehranchian, A. (2006). On the relationship between energy consumption and real GDP in Iran: An application of VEC. Iranian Economic Review, 11, 353–367. Warr, B. S., & Ayres, R. U. (2010). Evidence of causality between the quantity and quality of energy consumption and economic growth. Energy, 35, 1688–1693. http://dx.doi.org/10.1016/j.energy.2009.12.017

Wolde-Rufael, Y. (2004). Disaggregated industrial energy consumption and GDP: The case of Shanghai, 1952– 1999. Energy Economics, 26(1), 69–75. http://dx.doi.org/10.1016/S0140-9883(03)00032-X Yoo, S. H. (2005). Electricity consumption and economic growth: Evidence from Korea. Energy Policy, 33, 1627–1632. http://dx.doi.org/10.1016/j.enpol.2004.02.002 Yoo, S. H. (2006). The causal relationship between electricity consumption and economic growth in the ASEAN countries. Energy Policy, 34(18), 3573–3582. http://dx.doi.org/10.1016/j.enpol.2005.07.011

Yoo, S. H., & Kwak, S. Y. (2010). Electricity consumption and economic growth in seven South American countries. Energy Policy, 38, 181–188. http://dx.doi.org/10.1016/j.enpol.2009.09.003 Yuan, J., Zhao, C., Yu, S., & Hu, Z. (2007). Electricity consumption and economic growth in China: Cointegration and co-feature analysis. Energy Economics, 29, 1179–1191. http://dx.doi.org/10.1016/j.eneco.2006.09.005

Zhang, W., & Yang, S. (2012). The influence of energy consumption of China on its real GDP from aggregated and disaggregated viewpoints. Energy Policy, (in press).

Zhang, Y., & Li, W. (2007). Study on causal relationship between coal consumption and economic growth in China. Resources & Industries, 9(1), 89–93.

Zhou, G., & Chau, K. W. (2006). Short and long-run effects between oil consumption and economic growth in China. Energy Policy, 34, 3644–3655. http://dx.doi.org/10.1016/j.enpol.2005.08.009