Energy consumption and economic growth: evidence from nonlinear panel cointegration and causality tests

Omay, Tolga and Hasanov, Mubariz and Ucar, Nuri (2012): Energy consumption and economic growth: evidence from nonlinear panel cointegration and causality tests.

Abstract

In this paper, we propose a nonlinear cointegration test for heterogeneous panels where the alternative hypothesis is an exponential smooth transition (ESTAR) model. We apply our tests for investigating cointegration relationship between energy consumption and economic growth for the G7 countries covering the period 1977-2007. Moreover, we estimate a nonlinear Panel Vector Error Correction Model in order to analyze the direction of the causality between energy consumption and economic growth. By using nonlinear causality tests we analyze the causality relationships in low economic growth and high economic growth regimes. Furthermore, we deal with the cross section dependency problem in both nonlinear panel cointegration test and nonlinear Panel Vector Error Correction Model.

• Item Type: MPRA Paper
• Language: English
• Keywords: Nonlinear panel cointegration, nonlinear Panel Vector Error Correction Model, cross section dependency
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models

References

Aloui, C., Jammazi, R. 2009. The effects of crude oil shocks on stock market shifts behaviour: A regime switching approach. Energy Economics 31, 789-799

Akinlo, A.E., 2008. Energy consumption and economic growth: evidence from 11 Sub-Sahara African countries. Energy Economics 30 (5), 2391–2400.

Ang, J.B., 2008. Economic development, pollutant emissions and energy consumption in Malaysia. Journal of Policy Modeling 30, 271–278.

Apergis, N., Payne, J.E., 2009. Energy consumption and economic growth in Central America: evidence from a panel cointegration and error correction model. Energy Economics 31, 211–216.

Balcilar M., Ozdemir, Z.A., Arslanturk, Y., 2010. Economic growth and energy consumption causal nexus viewed through a bootstrap rolling window. Energy Economics 32, 1398-1410

Bai, J., Ng, S., 2004. A PANIC Attack on Unit Roots and Cointegration. Econometrica 72(4), 1127-1177.

Bai, J., Kao, C., Ng, S., 2009. Panel cointegration with global stochastic trends. Journal of Econometrics 149(1), 82-99.

Banerjee, A., Marcellino, M., Osbat, C., 2004. Some cautions on the use of panel methods for integrated series of macroeconomics data. Econometrics Journal, 7, 322-340.

Beaudreau, B.C., 2005. Engineering and economic growth. Structural Change and Economic Dynamics 16, 211–220.

Belloumi, M., 2009. Energy consumption and GDP in Tunisia: cointegration and causality analysis. Energy Policy 37 (7), 2745–2753.

Boden, T.A., G. Marland, and R.J. Andres. 2010. Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, U.S. Department of Energy, Oak Ridge, Tenn., U.S.A. doi 10.3334/CDIAC/00001_V2010.

Chang, Y., 2004. Bootstrap unit root tests in panels with cross-sectional dependency. Journal of Econometrics, 120(2), pages 263-293.

Cheng-Lang, Y., Lin, H.-P., Chang, C.-H., 2010. Linear and nonlinear causality between sectoral electricity consumption and economic growth: Evidence from Taiwan. Energy Policy Volume 38 (11), 6570-6573

Chiou-Wei, S.Z., Chen, Ching-Fu, Zhu, Z., 2008. Economic growth and energy consumption revisited—evidence from linear and nonlinear Granger causality. Energy Economics 30(6),3063–3076.

Costantini, V., Martini, C., 2010. The causality between energy consumption and economic growth: A multi-sectoral analysis using non-stationary cointegrated panel data. Energy Economics 32, 591-603

Engle, R.F., Granger, C.W.J., 1987. Co-integration and error correction: representation, estimation, and testing. Econometrica 55: 251-276

Erdal, G., Erdal, H., Esengün, K., 2008. The causality between energy consumption and economic growth in Turkey. Energy Policy 36(10), 3838–3842.

Francis, B.M., Moseley, L., Iyare, S.O., 2007. Energy consumption and projected growth in selected Caribbean countries. Energy Economics 29, 1224–1232.

Gabreyohannes, E., 2010. A nonlinear approach to modelling the residential electricity consumption in Ethiopia. Energy Economics 32, 515-523

Ghali, K.H., El-Sakka, M.I.T., 2004. Energy use and output growth in Canada: a multivariate cointegration analysis. Energy Economics 26 (2), 225–238.

Glasure, Y.U., 2002. Energy and national income in Korea: further evidence on the role of omitted variables. Energy Economics 24, 355–365.

Gonzalez, A., Teräsvirta, T., Dijk, D. 2005. Panel smooth transition regression models, Working Paper Series in Economics and Finance No 604, Stockholm School of Economics, Sweden. Granger, C.W.J., Teräsvirta, T., 1993. Modelling nonlinear economic relationships. Advanced Texts in Econometrics. Oxford University Press, New York, USA.

Greene, W.H., 1997. Econometric Analysis, Third Edition. Prentice Hall, New Jersey, USA.

Halicioglu, F., 2009. An econometric study of CO2 emissions, energy consumption, income and foreign trade in Turkey. Energy Policy 37, 1156–1164.

Hamilton, J.D. 2003. What is an oil shock? Journal of Econometrics 113, 363-398

Hansen, B. 1999. Threshold effects in non-dynamic panels: estimation, testing and inference. Journal of Econometrics 93(2), 345-368

Hasanov, M., Telatar, E. 2011. A re-examination of stationarity of energy consumption: Evidence from new unit root tests. Energy Policy 39, 7726–7738

Heston, A., Summers, R., and Aten, B. (2009) Penn World Table Version 6.3. Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009.

Ho, C-Y., Siu, K.W., 2007. A dynamic equilibrium of electricity consumption and GDP in Hong Kong: an empirical investigation. Energy Policy 35 (4), 2507–2513.

Huang, B.N., Hwang, M.J. Yang, C.W., 2008. Does more energy consumption bolster economic growth? An application of the nonlinear threshold regression model. Energy Policy 36, 755-767

Im, K.S., Pesaran, H., Shin, Y., 2003. Testing for unit roots in heterogeneous panels. Journal of Econometrics 115, 53–74.

Kapetanios, G., Shin, Y., Snell, A. 2003. Testing for a unit root in the nonlinear STAR framework. Journal of Econometrics 112, 359-79.

Kapetanios, G., Shin, Y., Snell, A. 2006. Testing for cointegration in nonlinear smooth transition error correction models. Econometric Theory 22, 279-303.

Kapetanios, G., Pesaran, M. H., Yamagata, T. 2011. Panels with non-stationary multifactor error structures. Journal of Econometrics, 160(2), 326-348.

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

Lee, C.C., 2006. The causality relationship between energy consumption and GDP in G-11 countries revisited. Energy Policy 34, 1086–1093.

Lee, C.C., Chien, M.S., 2010. Dynamic modelling of energy consumption, capital stock, and real income in G-7 countries. Energy Economics 32, 564-581

Lee, C.C., Chang, C.P., 2007. Energy consumption and GDP revisited: a panel analysis of developed and developing countries. Energy Economics 29, 1206–1223.

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

Li, J. 2006. Testing Granger causality in the presence of threshold effects. International Journal of Forecasting 22, 771–780.

Luukkonen, R., Saikkonen, P., Teräsvirta, T. 1988. Testing linearity against smooth transition autoregressive models. Biometrika 75, pp. 491-99

Maddala, G. S., Wu, S. 1999. A Comparative Study of Unit Root Tests with Panel Data and New Simple Test. Oxford Bulletin of Economics and Statistics 61, 631-652.

Maki, D. 2010. An alternative procedure to test for cointegration in STAR models. Mathematics and Computers in Simulation 80, 999-1006

Mehrara, M., 2007. Energy consumption and economic growth: the case of oil exporting countries. Energy Policy 35 (5), 2939–2945.

Moon, Y.S., Sonn, Y.H., 1996. Productive energy consumption and economic growth: an endogenous growth model and its empirical application. Resource and Energy Economics 18, 189–200.

Moon, H.R., Hyungsik, R., Perron, B., 2004. Testing for a unit root in panels with dynamic factors. Journal of Econometrics, 122(1), 81-126.

Narayan, P.K., Smyth, R., Prasad, A., 2007. Electricity consumption in the G7 countries: a panel cointegration analysis of residential demand elasticities. Energy Policy 35 (9), 4485–4494.

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.

Oh, W., Lee, K., 2004. Causal relationship between energy consumption and GDP: the case of Korea 1970–1999. Energy Economics 26 (1), 51–59.

Omay, T., Kan, E.O., 2010. Re-examining the Threshold Effects in the Inflation-Growth Nexus: OECD Evidence. Economic Modelling 27 (5), 995-1004.

Ozturk, I., 2010. A literature survey on energy–growth nexus. Energy Policy 38, 340–349.

Payne, J.E., 2009. On the dynamics of energy consumption and output in the US. Applied Energy 86 (4), 575–577.

Pedroni, P., 1999. Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economic and Statistics 61, 653–678.

Pesaran, M.H. 2004. General diagnostic tests for cross-section dependence in panels. Cambridge Working Papers in Economics 0435, Faculty of Economics, University of Cambridge, UK.

Pesaran, M.H. 2007. A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics 22(2), 265-312.

Rahman, S., Serletis, A. 2010 The Asymmetric Effects of Oil Price and Monetary Policy Shocks: A Nonlinear VAR Approach, Energy Economics 32, 1460-1466

Soytas, U., Sari, R., 2003. Energy consumption and GDP: causality relationship in G-7 countries and emerging markets. Energy Economics 25, 33–37.

Soytas, U., Sari, R., 2006. Energy consumption and income in G7 countries. Journal of Policy Modeling 28, 739–750

Stern, D.I., 2000. A multivariate cointegration analysis of the role of energy in the US macroeconomy. Energy Economics 22, 267–283.

Teräsvirta, T., 1994. Specification, estimation, and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association 89, 208–218.

Teräsvirta, T., Anderson, H.M., 1992. Characterizing nonlinearities in business cycles using smooth transition autoregressive models. Journal of Applied Econometrics 7, S119–S136.

Ucar N. and Omay T.,(2009) “Testing For Unit Root In Nonlinear Heterogeneous Panels” Economics Letters. 104(1), 5-7.

Wolde-Rufael, Y., 2004. Disaggregated industrial energy consumption and GDP: the case of Shanghai. Energy Economics 26, 69–75.

Zachariadis, T., 2007. Exploring the relationship between energy use and economic growth with bivariate models: new evidence from G-7 countries. Energy Economics 29 (6), 1233–1253.

Zamani, M., 2007. Energy consumption and economic activities in Iran. Energy Economics 29 (6), 1135–1140.

Zhang, X.P., Cheng, X.M., 2009. Energy consumption, carbon emissions, and economic growth in China. Ecological Economics 68 (10), 2706–2712.