How Strong is the Causal Relationship between Globalization and Energy Consumption in Developed Economies? A Country-Specific Time-Series and Panel Analysis

Shahbaz, Muhammad and Shahzad, Syed Jawad Hussain and Mahalik, Mantu Kumar and Sadorsky, Perry (2017): How Strong is the Causal Relationship between Globalization and Energy Consumption in Developed Economies? A Country-Specific Time-Series and Panel Analysis.

Abstract

We examine the causal relationship between globalization, economic growth and energy consumption for 25 developed economies using both time series and panel data techniques for the period 1970-2014. Due to the presence of cross-sectional dependence in the panel (countries from Asia, North America, Western Europe and Oceania), we employ the Pesaran (2007) CIPS test to ascertain unit root properties. The Westerlund (2007) cointegration test indicates the presence of a long-run association between globalization, economic growth and energy consumption. Long-run heterogeneous panel elasticities are estimated through the Pesaran (2006) common correlated effects mean group (CMG) estimator and the Eberhardt and Teal (2010) augmented mean group (AMG) estimator. The causality between the variables is examined via Dumitrescu and Hurlin (2012) and, Emirmahmutoglu and Kose (2011) Granger causality tests. The empirical results reveal that, for most countries, globalization increases energy consumption. In the USA and UK globalization is negatively correlated with energy consumption. The causality analysis indicates the presence of the globalization driven energy consumption hypothesis. This empirical analysis suggests insightful policy guidelines for policy makers using globalization as an economic tool to utilize energy efficiently for sustainable economic development in the long-run.

• Item Type: MPRA Paper
• Language: English
• Keywords: Globalization, Energy Consumption, Causality
• Subjects: A - General Economics and Teaching > A1 - General Economics

References

Aissa, B. M.S., Jebli, B. M., Youssef, B. S. (2014). Output, renewable energy consumption and trade in Africa. Energy Policy, 66, 11-18.

Antweiler, W., Copeland, B. R. and Taylor, M. S. (2001). Is Free Trade Good for the Environment? The American Economic Review, 91 (4), 877-908.

Baek, J., Cho, Y. and Koo, W. W. (2009). The environmental consequences of globalization: A country-specific time-series analysis. Ecological economics, 68(8), 2255-2264.

Breitung, J. (2005). A parametric approach to the estimation of cointegration vectors in panel data. Econometric Reviews 24, 151-173.

Breusch, T. and Pagan, A. (1980).The LM test and its application to model specification in econometrics. Review of Economic Studies 47, 239-254.

Chang, T., Lee, C. C., Hung. K. and Lee, K. H. (2014). Does military spending really matter for economic growth and China and G7 countries: the roles of dependency and heterogeneity.Defense and Peace Economics 25, 177-191.

Cole, M. A. (2006). Does Trade Liberalization Increase Energy Use? Economics Letters, 92 (1), 108-112.

Copeland, B. R. (2005). Policy endogeneity and the effects of trade on the environment. Agricultural and Resource Economic Review, 34(1), 1-15.

Copeland, B. R. and Taylor, M. S. (1994). North-South trade and the environment.The Quarterly Journal of Economics, 755-787.

Copeland, B. R. and Taylor, M. S. (2004). Trade, Growth, and the Environment. Journal of Economic Literature, 42(1), 7-71.

Csereklyei, Z., Rubio, M. D. M., and Stern, D. I. (2016). Energy and economic growth: the stylized facts.https://digitalcollections.anu.edu.au/handle/1885/95390, and forthcoming in The Energy Journal.

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

Dollar, D. and Kraay, A. (2004).Trade, Growth and Poverty. The Economic Journal, 114 (493), 22-49.

Dreher, A. (2006). Does globalization affect growth? Evidence from a new index of globalization. Applied Economics 38, 1091-1110.

Dumitrescu, E-I.andHurlin, C. (2012).Testing for Granger non-causality in heterogeneous panels. Economic Modelling 29, 1450-1460.

Eberhardt, M. and Teal, F. (2010).Productivity analysis in global manufacturing production.Discussion Paper 515, Department of Economics, University of Oxford. ttp://www.economics.ox.ac.uk/research/WP/pdf/paper515.pdf.

Emirmahmutoglu, F. and Kose, N. (2011).Testing for Granger causality in heterogeneous mixed panels. Economic Modeling 28, 870-876.

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

Erkan, C., Mucuk, M. and Uysal, D. (2010). The impact of energy consumption on exports: the Turkish case. Asian Journal of Business Management, 2, 17-23.

Fisher, R.(1932). Statistical Methods for Research Workers. Oliver and Boyd, London.

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

Granger, C. W. J. (1981).Some properties of time series data and their use in econometric model specification. Journal of Econometrics 16, 121-130.

Groen, J. J. J. and Kleibergen, F. (2003).Likelihood-based cointegration analysis in panels of vector error-correction models. Journal of Business & Economic Statistics 21, 295-318.

Grossman, G. and Krueger, A. (1991).Environmental Impacts of the North American Free Trade Agreement. NBER Working Paper No. 3914.

Grossman, G. and Krueger, A. (1995).Economic growth and the environment.Quarterly Journal of Economics, 353–377.

Hansen, G. D., and Prescott, E. C. (2002).Malthus to Solow. The American Economic Review, 92(4), 1205-1217.

Hill, C.W.L. (2006). Global Business Today.McGraw-Hill Irwin, New York.

Islam, F., Shahbaz, M., Ahmed, A. U. and Alam, M. M. (2013). Financial development and energy consumption nexus in Malaysia: a multivariate time series analysis. Economic Modelling, 30, 435-41.

Jena, P. R. and Grote, U. (2008).Growth-trade-environment nexus in India. Economics Bulletin, 17(11), 1-17.

Johansen, S. (1991).Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59, 1551-80.

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

Kahuthu, A. (2006).Economic growth and environmental degradation in a global context. Environment, Development and Sustainability 8, 55-68.

Kao, C. (1999). Spurious regression and residual based tests for cointegration in panel data. Journal of Econometrics 90, 1-44.

Larsson, R., Lyhagen, 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.

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

Lean, H. H. and Smyth, R. (2010b). Multivariate Granger causality between electricity generation, exports, prices and GDP in Malaysia.Energy, 35, 3640-8.

Li, L. (2010). An empirical analysis of relationship between exports and energy consumption in Shandong province. International Journal of Business Management, 5, 214-216.

McCoskey, S. and Kao, C. (1998).A residual-based test of the null of cointegration in panel data.Econometric Reviews 17, 57-84.

Menegaki, A.N. andOzturk, I. (2013).Growth and energy nexus in Europe revisited: Evidence from a fixed effects political economy model. Energy Policy, 61, 881-887.

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, 229-36.

Ozturk, I. (2010). A literature survey on energy-growth nexus. Energy Policy, 38(1), 340-349.

Ozturk, I. and Acaravci, A. (2012).The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Economics, 36, 262-267.

Panayotou, T. (1993).Empirical Tests and policy analysis of environmental degradation at different stages of economic development. Working Paper WP238, Technology and Employment Programme, Geneva: International Labor Office.

Panayotou, T. (1997).Demystifying the environmental Kuznets curve: turning a black box into a policy tool.Environment and Development Economics, 2(04), 465-484.

Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors.Working Paper, Indiana University, July 25, 1999a, pp.1-19.

Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74, 967-1012.

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

Pesaran, M. H. and Yamagata, T. (2008).Testing slope homogeneity in large panels. Journal of Econometrics 142, 50-93.

Pesaran, M. H., Ullah, A. and Yamagata, T. (2008).A bias-adjusted LM test of error cross-section independence. Econometrics Journal 11, 105-127.

Sadorsky, P. (2011). Trade and energy consumption in the Middle East. Energy Economics, 33(5), 739-749.

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

Selden, T. M. and D. Song (1994). Environmental quality and development: Is there a Kuznets curve for air pollution emissions? Journal of Environmental Economics and Management 27: 147–162.

Shafik, N. and Bandyopadhyay, S. (1992). Economic growth and environmental quality: Time Series and cross-country evidence. World Bank Policy Research Working Paper, WPS 904.

Shahbaz, M. and Lean, H. H. (2012). Does financial development increase energy consumption? The role of industrialization and urbanization in Tunisia.Energy Policy, 40, 473-9.

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 Sustainable Energy Reviews, 18, 87-94.

Shahbaz, M., Mallick, H., Mahalik, M. K. and Loganathan, N. (2015). Does globalization impede environmental quality in India? Ecological Indicators, 52, 379-393.

Shahbaz, M., Mallick, H., Mahalik, M. K. and Sadorsky, P. (2016). The role of globalization on the recent evolution of energy demand in India: Implications for sustainable development. Energy Economics, 55, 52-68.

Shahbaz, M., Nasreen, S., Ling, C. H. and Sbia, R. (2014).Causality between trade openness and energy consumption: What causes what in high, middle and low income countries. Energy Policy, 70, 126-143.

Smulders, S. and M. de Nooij (2003). The Impact of Energy Conservation on Technology and Economic Growth. Resource and Energy Economics 25, 59–79.

Stern D. I. (2007). The effect of NAFTA on energy and environmental efficiency in Mexico. Policy Studies Journal 35(2), 291-322.

Stern, D. I., andKander, A. (2010).The role of energy in the Industrial Revolution and Modern Economic Growth.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1759705

Toda, H.Y. and Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics 66, 225-250.

Westerlund, J. (2005). New simple tests for panel cointegration. Econometric Reviews 24, 297-316.

Westerlund, J. (2007). Testing for error correction in panel data.Oxford Bulletin of Economics and Statistics 69, 709-748.