Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis

In this paper we estimate residential electricity demand elasticities and conduct an analysis of the causal relationship between electricity demand, disposable income and electricity price for a group of several OECD members. We apply panel cointegration and Granger causality testing to a data set consisting of eighteen countries in the cross-sectional dimension and the years 1981–2008 in the time domain. Our results for the whole panel indicate a near unity income elasticity and an inelastic price elasticity of approximately –0.4 in the long run. These results are robust with regard to the estimation methods employed (group-means panel FMOLS and DOLS). In the short run, our estimates from an ECM indicate an income elasticity of 0.2 and a price elasticity of approximately –0.1. Moreover, our tests on Granger causality provide an indication for a bidirectional causal relationship between electricity consumption and economic growth. Hence, our findings are in favor of the feedback hypothesis.