Income, trade openness and energy interactions: Evidence from simultaneous equation modeling

This survey aims to examine the three-way causality between income, trade openness, and energy consumption through the use of the simultaneous-equation panel data models (SEPDM) for 24 middle- and high-income countries for a time span 1990–2011. We were motivated by the fact that there is no study has investigated simultaneously these linkages through the use of the simultaneous equations models approach. Our empirical highlights for the high-income countries pointed out the presence of feedback causality between energy consumption and income and between trade openness and income. However, the findings support the occurrence of unidirectional causality running from trade openness to energy consumption without any feedback effects. In the case of middle-income countries, we recorded also the occurrence of feedback relationships between energy consumption and income and between trade openness and income, and a unidirectional causality running from energy consumption to trade. These empirical insights are of particular interest to policymakers as they help build sound economic policies to sustain economic development.