Energy consumption and economic growth new insights into the cointegration relationship

Energy consumption and economic growth: New insights into the cointegration relationship

energy consumption and economic growth new insights into the cointegration relationship

cointegration test reveals there is a long-run equilibrium relationship hypothesis (bidirectional relationship between energy and economic growth in which causation and economic growth can be categorized into four testable hypotheses: growth, conservation, .. Energy consumption and economic growth : New insights. This paper examines the long-run relationship between energy consumption and real Indeed, cointegration between the common components of the underlying variables Energy consumption and economic growth: New insights into the. Energy consumption (EC) is related to economic growth; the more the . cointegration relationship between tourist arrivals, economic growth, energy . a new and inestimable insight into the tourism earnings-economic.

Later on, a large number of empirical studies using different approaches, time periods, and proxy variables have tested this causal relationship in a number of countries. Lines of evidence from these empirical studies are still mixed at best and controversial results in terms of the direction of causality and the strength of impact of energy use on economic growth are reported.

Some papers documented unidirectional causality from energy consumption to economic growth growth hypothesis. Other researchers have documented unidirectional causality running from economic growth to energy consumption conservation hypothesis.

This hypothesis is supported by Lise and van Montfort [ 28 ], Erdal et al. Next, the feedback hypothesis is supported if bidirectional causality between energy consumption and growth is found.

This is supported by Glasure [ 36 ], Lee and Chang [ 20 ], Belke et al. The final hypothesis is that of neutrality, where no causality between energy consumption and growth is found, and it is supported by Soytas et al.

In the case of Lebanon, Dagher and Yacoubian [ 46 ] applied the cointegration developed by Johansen [ 47 ] and Granger causality by Toda and Yamamoto [ 48 ] as well as the VECM Granger causality to examine cointegration and causality relationship between energy consumption and economic growth.

Their results indicated that long run relationship exists between the variables and energy consumption and economic growth are bidirectional Granger cause. Financial Development and Economic Growth Since pioneering works of Schumpeter [ 49 ], of Goldsmith [ 50 ], and recently of McKinnon [ 51 ] and Shaw [ 52 ], the relation between financial development and economic growth has attracted interest of both theorists and practitioners.

Energy consumption and economic growth: New insights into the cointegration relationship

Demirguc-Kunt and Levine [ 53 ] and Levine [ 54 ] provided an extensive literature survey on this topic. By increasing the size of savings and improving the efficiency of investment, financial development leads to higher economic growth [ 545859 ]. Furthermore, financial development would support financial innovation and promote the adoption of advanced technology [ 5760 ]. Ibrahim [ 61 ] observed that financial development stimulates economic growth in Malaysia. Jalil and Ma [ 62 ] found that financial development contributes to economic growth by increasing capital formation in Pakistan and China.

Shahbaz [ 57 ] showed the same results in case of Pakistan. Coccorese [ 63 ] reported that economic growth is Granger cause of financial development.

They validated the existence of supply-side hypothesis. Kar and Mandal [ 65 ] also noted that financial development promotes economic growth by enhancing capitalization in India. Liang and Teng [ 67 ] investigated the relationship between financial development and economic growth in China using VAR approach. They noted cointegration between the variables and economic growth Granger causes financial development.

Fung [ 68 ] finds that positive impact of economic growth on financial development is due to productivity boost. Chukwu and Agu [ 69 ] also supported demand-side hypothesis in case of Nigeria. Amarathunga [ 70 ] also confirmed the presence of demand-side hypothesis in case of Sri Lanka.

The results indicated that the variables are cointegration and financial development is Granger cause of economic growth. Odhiambo [ 7273 ] investigated the causality between financial development, foreign capital inflows, and economic growth for Tunisia.

Energy Consumption and Economic Growth: New Insights into the Cointegration Relationship

The empirical results revealed that financial development follows economic growth and that financial development and foreign capital inflows are interdependent. Odhiambo [ 7273 ] used trivariate model to examine causality between financial development and economic growth by incorporating foreign capital inflows.

The empirical evidence validated the existence of demand-side hypothesis in Tanzania. The feedback effect between financial development and economic growth is also found in the existing literature. For example, Ilhan [ 75 ] applied cointegration and error correction method for the relationship between financial development and economic growth. He noted that cointegration exists and that the feedback effect is validated in case of South Africa.

The same exercise was conducted by Al-Malkawi et al. Eslamloueyan and Sakhaei [ 78 ] applied generalized least square GLS method with cross-section seemingly unrelated regression SUR to probe the relationship between financial development and economic growth and confirmed the findings of Husam-Aldin et al.

On the contrary, Bakhouche [ 80 ] reported that financial development does not promote economic growth and that economic growth does not contribute to financial development, that is, neutral hypothesis. Financial Development and Energy Consumption Love and Zicchino [ 82 ] reported that financial development impacts on real interest can possibly result in an increase in investment.

Energy Consumption, Economic Growth and CO2 Emission Nexus in Pakistan

This in turn can promote economic growth and generate employment opportunities which further increase income. Such impact will increase purchases by consumers especially of durable items [ 8384 ] which add further to energy use. This shows that the linkages between energy use and economic growth are better understood when we go beyond a simple bivariate framework.

Karanfil [ 85 ] suggested using stock market capitalization, liquid liabilities, and domestic credit to the private sector, each as share of GDP among the financial variables.

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Yandan and Lijun [ 86 ] examined the impact of financial development on primary energy consumption in Guangdong China. Their study finds Granger causality running from energy consumption to financial development, while the reverse is insignificant.

Sadorsky [ 83 ] examined 22 emerging economies — using different indicators of financial development. His results confirmed that energy consumption is positively linked to economic growth but the impact is small.

Sadorsky [ 87 ] investigated the impact of financial development on energy consumption using data of 9 Central and Eastern European frontier economies. He reported that financial development increases energy demand once deposit money and bank assets to GDP, financial system deposits to GDP, liquid liabilities to GDP, and stock market capitalization are used as measures of financial development.

Similarly, Shahbaz and Lean [ 88 ] examined energy demand for Tunisia and reported results showing that financial development increases energy demand resulting from economic growth. In the case of Malaysia, Tang and Tan [ 89 ] examined the relationship between financial development and energy consumption by incorporating relative prices and foreign direct investment FDI in energy demand function.

They report bidirectional causality between financial development and energy consumption both in the short and the long runs. The feedback effect is also reported between financial development and energy consumption in the long run but financial development Granger causes energy demand in short run.

Motivation of the Study This paper provides an investigation of the relationship between economic growth, financial development, and energy consumption using monthly data over the period of — in case of Lebanon. This is a country with a sectarian-based parliamentary republic located in the Middle East, with a population of approximately 4.

Employment in that sector as a share of total employment stood at This is not surprising given that the percentage of tourism and travel in GDP stood at This is not unexpected in a country that is known for its diverse atmosphere, earliest history, ancient Roman ruins, preserved castles, and notable mosques and churches, as well as its stunning beaches in the Mediterranean Sea and rugged ski resorts.

The civil war — had a heavy unconstructive impact on the nation, causing the country to have a high budget deficit.

Even more recent, the assassination of ex-Prime Minister Rafik Hariri in Februarythe July war between Lebanon and Israel, the sit-ins, protests and clashes between the opposing government alliances in tilland the constant instability and corruption within Lebanon contributed to the huge deficit and the increase in sectarianism.

Ingrowth in Lebanon was stimulated by rising nonresident deposits, an elevated number of tourist arrivals, and a vigorous real estate market. We think that examining the possible linkages between economic growth, financial development, and energy consumption in Lebanon is justified and needed for three reasons. Second, the clear interface of tourism and energy use, in Lebanon, is another important factor for policy makers to consider given the outages of electricity and shortages of some fuels in the country.

Third, the authors are not aware of any study of this issue for Lebanon with the exception of that of Dagher and Yacoubian [ 46 ]. Our study improves upon theirs, however, since we do not employ a bivariate framework as they did and since our sample is larger than theirs — and excludes the years of the civil war in Lebanon — The findings should help better understand this relationship that underlies energy use, financial development, and economic growth nexus for Lebanon which will help identify an appropriate policy mix for these sectors in future economic planning for economic growth of that country.

The Data and Estimation Strategy In this study our primary interest lies in the energy consumption-economic growth nexus, financial development-economic growth nexus, and energy consumption-financial development nexus. The prime hypothesis of energy consumption-economic growth causality postulates that economic growth is impeded by energy conservation policies if causality runs from energy consumption to economic growth.

Energy conservation policies do not have adverse impact on economic growth if causality is running from economic growth to energy consumption or no causality is found between both of the variables. The second hypothesis deals with financial development and economic growth. Financial development boosts investment activities by directing financial resources to new and existing potential ventures which not only enhances domestic production but also raises the rate of economic growth.

This implies that financial development drives economic growth.

energy consumption and economic growth new insights into the cointegration relationship

This unidirectional causality running from financial development to economic growth is called supply-side hypothesis. The rise in per capita income or economic growth will increase the demand of financial services for both customers consumption purpose and producers investment purpose which as a result raises financial development. This shows that economic growth leading to financial development is called demand-side hypothesis. The third hypothesis deals with energy consumption and financial development nexus.

Financial development results in an increase in funds availability to investors for new and existing investment and to consumers to purchase ticket items which directly can increase energy demand.

energy consumption and economic growth new insights into the cointegration relationship

In turn, a rise in demand for financial services associated with financial development can lead to increased demand for energy. On the other hand, an increase in energy consumption as a result of an increase in the level of income may also lead to further financial development as a larger percentage of the population is exposed to the need to use financial services.

Finally financial development and energy use may be complementary in nature as a feedback effect may exist. Nevertheless, policies will not be sufficient if the effect of energy consumption in the environment is not considered. Increase in energy consumption cause environmental issues by produces CO2 emission. Studies Sathiendrakumar, ; Fong et al. Sathiendrakumar explored some policies to protect environment while enhancing economic growth. He supports the greenhouse gas emission which causes friendly environment and healthy ecosystem.

Similarly, Jalil and Mahmud argued that increase in energy consumption simultaneously boost economic growth and hazard environment, hence hamper economic development. In the recent years it is now more difficult to simultaneously reduce energy consumption and enhance economic development Islam et al. He argued that increase energy consumption cause more environmental issues as compare to benefits of increase economic growth.

However, Peng and Sun founded that it not possible to reduce energy consumption to encounter CO2 because energy consumption strongly associated with economic growth. These results show that economic development of highly energy consumption countries may affect by unfavorable policies.

With the background of these findings, the present study have objective to explore the relationship among energy consumption, economic growth and CO2 emission in case of Pakistan. The perpetual increase in energy consumption and the continuous increase in CO2 emission in Pakistan motivate to investigate the relationship among energy consumption, economic growth and CO2 emission in Pakistan.

Table 1 reported the trends of energy consumption, CO2 emission and economic growth in Pakistan from to Energy consumption was increased significantly from and there is no decrease in this period. Energy consumption in Pakistan was 24, CO2 emission also show significant increasing trend from CO2 emission recorded 32, kt in and only after five years increased This significant increasing trend in CO2 emission is alarm for environmental issues in Pakistan. In economic growth in Pakistan recorded In case of economic growth of Pakistan it does not show constancy during the period of In addition, economic growth in Pakistan does not increase as increased energy consumption because of the supply shortfall in the energy.

It is believed that energy is the helping hand of every economy because it an essential input to support commercial, domestic and industrial activities. The survey has further shown that since energy crisis in Pakistan had been appearing and expanded in which vastly destructively affected the economic growth and development, where consequently unemployment increased.

energy consumption and economic growth new insights into the cointegration relationship

The government of Pakistan though understood the energy problems faced by the country and making some efforts to solve the energy problems. Apparently, on one hand, energy consumption in Pakistan is absolutely more because the total population of Pakistan is nearly million. Therefore, based on the significance of energy, the aim of this study is to quantitatively examine the relationship among energy consumption, economic growth and CO2 emission in of Pakistan.

We use time series annual data during the period ranging from Hope, this is the fresh study on the subject topic under the study. Further, this study will not only contribute to the energy and economic growth literature but also will guide the policy makers to chalk out right, effective and appropriate policy in order to improve energy system in Pakistan.

The prior studies used different econometric techniques to investigate the relationship among energy consumption, CO2 emission and economic growth. Numerous researchers El-Din, ; Squalli, ; Zachariadis, ; Ighodaro, ; Hong, ; Shahiduzzaman and Alam, explored the relationship between energy consumption and economic growth.

El-Din studied the long run elasticity of total energy consumption from in Jordan. The results claim that income elasticity of demand for total energy consumption is 1. The results of Bound test indicate that increase in consumption of electricity cause economic growth in five countries, dependent in three countries, less dependent in four countries and independent in two countries from to The study applied Autoregressive Distributed Lag ARDL model during and found long run relationship between energy consumption and economic growth in G-7 countries.

In addition, Ighodaro utilize time series data from to in case of Nigeria. The results of Johansen cointegration claim that there is long run relationship between health expenditure, energy consumption and economic growth.