Causality between Trade Openness and Energy Consumption: What Causes What in High, Middle and Low Income countries

Shahbaz, Muhammad and Nasreen, Samia and Ling, Chong Hui and Sbia, Rashid (2013): Causality between Trade Openness and Energy Consumption: What Causes What in High, Middle and Low Income countries.

Abstract

This paper explores the relationship between trade openness and energy consumption using data of 91 high, middle and low income countries. The study covers the period of 1980-2010. We have applied panel cointegration and causality approaches for long run and causal relationship between the variables.

Our results confirm the presence of cointegration between the variables. The relationship between trade openness and energy consumption is inverted U-shaped in high income countries but U-shaped in middle and low income countries. The homogenous and non-homogenous causality analysis reveals the bidirectional causality between trade openness and energy consumption.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade, Energy, Causality
• Subjects: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics

References

Akarca, A.T., and Long, T.V. (1979). Energy and employment: a time series analysis of the causal relationship. Resources and Energy, 5, 326-331.

Akarca, A.T., and Long, T.V. (1980). On the relationship between energy and GNP: a re-examination. Journal of Energy and Development, 5, 326-331.

Amirat, A., Bouri, A. (2010), Energy and economic growth: the Algerian case.

Apergis N. and Payne E.J. (2010). Energy consumption and growth in South America: Evidence from a panel error correction model. Energy Economics, 32, 1421-1426.

Arrow, K. J. (1962). The economic implications of learning by doing. The Review of Economic Studies, 29, 155-173.

Baltagi, B.H., Li, D., (2002). Series estimation of partially linear panel data models with fixed effects. Annals of Economics and Finance 3, 103-116.

Canning, D., and Pedroni, P., (2008). Infrastructure, long-run economic growth and causality tests for cointegrated panels. Manchester School, 76, 504-527.

Cole, M. A., (2006). Does trade liberalization increase energy use? Economics Letters, 92, 108-112.

Dedeoğlu, D., Kaya, H., (2013). Energy use, exports, imports and GDP: New evidence from the OECD countries. Energy Policy, 57, 469-476.

Ghani, G. M., (2012). Does trade liberalization affect energy consumption? Energy Policy, 43 (4), 285-290.

Granger, C.W.J. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37, 424-438.

Halicioglu, F., (2011). A dynamic study of income, energy and exports in Turkey. Energy, 36, 3348–3354.

Hossain, Md. S., (2012). Multivariate Granger causality between economic growth, electricity consumption, exports and remittances for the panel of three SAARC countries. Global Journal of Management and Business Research, 12, 41-54.

Hurlin, C. and Venet, B., (2001). Granger causality tests in panel data models with fixed Coefficients, 12th (EC)2 Conference on Causality and Exogeneity in Econometrics, Core Louvain – Ia – Neuve.

Im, K.S., Pesaran, M.H. and Shin, Y. (2003). Testing unit roots in heterogeneous panels. Journal of Econometrics, 115, 53-74.

Jena, P. R. and Grote, U. (2008). Growth-trade-environment nexus in India. Economics Bulletin, 17, 1-17.

Johansen, S., (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12, 231-254.

Johansen, S., (1995). A statistical analysis of cointegration for I(2) variables. Econometric Theory, 11, 25-59.

Karlsson, S., and Lothgren, M., (2000). On the power and interpretation of panel unit root tests. Economics Letters, 66, 249-255.

Kraft, J., Kraft, A., (1978). On the relationship between energy and GNP. Journal of Energy and Development, 3, 401-403.

Larsson, R., Lyahagen, J. and Lothgren, M., (2001). Likelihood-based cointegration tests in heterogeneous panels. Econometrics Journal, 4, 109-142.

Lean, H.H. and Smyth, R., (2010). On the dynamics of aggregate output, electricity consumption and exports in Malaysia: evidence from multivariate Granger causality tests. Applied Energy, 87, 1963-1971.

Levin, A., Lin, C-F. and Chu, C-S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108, 1-24.

Maddala, G.S., and Wu, S., (1999). A comparative study of unit root tests with panel data and new simple test. Oxford Bulletin of Economics and Statistics, 631-652.

Masih, A. M. M. and Masih, R., (1996). Energy consumption, real income and temporal causality results from a multi-country study based on cointegration and error correction modeling techniques. Energy Economics, 18, 165-183.

Nair-Reichert, U. and Weinhold, D. (2001). Causality tests for cross-country panels: a new look at FDI and economic growth in developing countries. Oxford Bulletin of Economics and Statistics, 63, 153-171.

Narayan, P. K., Narayan, S., Prasad, A., (2008). A structural VAR analysis of electricity consumption and real GDP: evidence from the G7 countries. Energy Policy, 36, 2765-2769.

Narayan, P.K. and Smyth, R., (2009). Multivariate Granger causality between electricity consumption, exports and GDP: evidence from a panel of Middle Eastern countries. Energy Policy, 37, 229-236.

Nondo C. and Kahsai M. (2009). Energy consumption and economic growth: evidence from COMESA countries. Selected Paper prepared for presentation at the Southern Agricultural Economics Association Annual Meeting, Atlanta, Georgia, January 31-February 3, 2009.

Noor S. and Siddiqi M.W. (2010). Energy consumption and economic growth in South Asian countries: a cointegrated panel analysis. International Journal of Human and Social Sciences, 5, 921-926.

Ozturk, I. (2010). A Literature Survey on Energy-Growth Nexus. Energy Policy, 38(1), 340-349.

Payne, J., 2010. A survey of the electricity consumption-growth literature. Applied Energy 87, 3723-3731.

Pedroni, P. (1999). Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors, Oxford Bulletin of Economics and Statistics, Special Issue, 61: 653-670.

Pedroni, P. (2004). Panel Cointegration: Asymptotic and Finite Samples Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis, Econometric Theory, 20: 597-625.

Sadorsky, P., (2011). Trade and energy consumption in the Middle East. Energy Economics, 33, 739-749.

Sadorsky, P., (2012). Energy consumption, output and trade in South America. Energy Economics, 34, 476-488.

Shahbaz, M. and Lean, H. H., (2012). Does financial development increase energy consumption? The role of industrialization and urbanization in Tunisia. Energy Policy 40, 473-479.

Shahbaz, M. Khan, S. and Tahir, M. I. (2013b). The dynamic links between energy consumption, economic growth, financial development and trade in China: fresh evidence from multivariate framework analysis. Energy Economics, 40, 8-21.

Shahbaz, M. Lean, H. H. and Farooq, A. (2013a). Natural gas consumption and economic growth in Pakistan. Renewable and Sustainable Energy Reviews, 18, 87-94.

Yang, H. Y., (2000). A note on the causal relationship between energy and GDP in Taiwan. Energy Economics, 22, 309-317.

Yu, E. S. H. and Choi, J. Y. (1985). The causal relationship between energy and GNP: an international comparison. Journal of Energy and Development, 10, 249-272.

Yu, E. S. H., Choi, J. Y. (1985) The Causal Relationship between Energy and GNP: An International Comparison. Journal of Energy and Development 10(2): 249-272.

Zahid, K., (2008). Energy-GDP relationship: a casual analysis for the five countries of South Asia. Applied Econometrics and International Development, 8, 167-180.