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Causality between Energy Consumption and Economic Growth: The Case of Pakistan

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Author Info

  • Qazi Muhammad Adnan Hye

    ()
    (University of Karachi, Pakistan.)

  • Sana Riaz

    ()
    (University of Karachi, Pakistan.)

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    Abstract

    This study seeks to determine the direction of causality between energy consumption (EC) and economic growth (EG), using annual data from 1971 to 2007. In our empirical analysis, we implement a bounds-testing approach to co-integration and an augmented form of the Granger causality test to identify the direction of the relationship between these variables both in the short and long run. Our findings suggest bidirectional causality between EG and EC in the short run; in the long run we find unidirectional causality from EG to EC. EC does not lead to EG in the long run because higher energy prices (oil prices) increase the cost of business, leading to a negative effect on EG. Additionally, when energy prices fluctuate, they create uncertainty that also affects economic growth. The study recommends direct investment in local energy resources.

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    Bibliographic Info

    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 13 (2008)
    Issue (Month): 2 (Jul-Dec)
    Pages: 45-58

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    Handle: RePEc:lje:journl:v:13:y:2008:i:2:p:45-58

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    Postal: Intersection Main Boulevard Phase VI DHA and Burki Road, Lahore
    Phone: (92-42) 6560939
    Web page: http://www.lahoreschoolofeconomics.edu.pk/EconomicsJournal/LJEIntro.aspx
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    Related research

    Keywords: Economic Growth; Energy Consumption; Pakistan.;

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    References

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    1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    2. Erol, Umit & Yu, Eden S. H., 1987. "Time series analysis of the causal relationships between U.S. energy and employment," Resources and Energy, Elsevier, vol. 9(1), pages 75-89, June.
    3. Mahmud, Fakhre & Chishti, Salim, 1990. "The demand for energy in the large-scale manufacturing sector of Pakistan," Energy Economics, Elsevier, vol. 12(4), pages 251-254, October.
    4. Stern, David I., 2000. "A multivariate cointegration analysis of the role of energy in the US macroeconomy," Energy Economics, Elsevier, vol. 22(2), pages 267-283, April.
    5. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
    6. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    7. Muhammad Irfan, 1982. "Wages, Employment and Trade Unions in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 21(1), pages 49-68.
    8. Yang, Hao-Yen, 2000. "A note on the causal relationship between energy and GDP in Taiwan," Energy Economics, Elsevier, vol. 22(3), pages 309-317, June.
    9. DeJong, David N. & Nankervis, John C. & Savin, N. E. & Whiteman, Charles H., 1992. "The power problems of unit root test in time series with autoregressive errors," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 323-343.
    10. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August.
    11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    12. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
    13. Cheng, Benjamin S. & Lai, Tin Wei, 1997. "An investigation of co-integration and causality between energy consumption and economic activity in Taiwan," Energy Economics, Elsevier, vol. 19(4), pages 435-444, October.
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    Cited by:
    1. Nazir, Sidra & Qayyum, Abdul, 2014. "Impact of Oil Price and Shocks on Economic Growth of Pakistan: Multivariate Analysis," MPRA Paper 55929, University Library of Munich, Germany, revised 2014.
    2. Muhammad Shahbaz & Mohamed Arouri & Frédéric Teulon, 2014. "Short- and Long-Run Relationships between Natural Gas Consumption and Economic Growth: Evidence from Pakistan," Working Papers 2014-289, Department of Research, Ipag Business School.
    3. Hasan, Dr. Syed Akif & Subhani, Muhammad Imtiaz & Osman, Ms. Amber, 2012. "KESC’s Performance, is it due to the Financial Crisis at KESC?," MPRA Paper 39095, University Library of Munich, Germany.
    4. Yılmaz Bayar & Hasan Alp Özel, 2014. "Electricity Consumption and Economic Growth in Emerging Economies," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, vol. 4(2), pages 15, April.
    5. Satti, Saqlain Latif & Hassan, Muhammad Shahid & Mahmood, Haider & Shahbaz, Muhammad, 2014. "Coal consumption: An alternate energy resource to fuel economic growth in Pakistan," Economic Modelling, Elsevier, vol. 36(C), pages 282-287.
    6. Tang, Chor Foon & Shahbaz, Muhammad, 2013. "Sectoral analysis of the causal relationship between electricity consumption and real output in Pakistan," Energy Policy, Elsevier, vol. 60(C), pages 885-891.
    7. Muhammad, Shahbaz & Lean, Hooi Hooi, 2011. "The Dynamics of Electricity Consumption and Economic Growth:A Revisit Study of Their Causality in Pakistan," MPRA Paper 33196, University Library of Munich, Germany, revised 06 Sep 2011.

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