Domestic Energy Consumption and Country’s Income Growth: A Quantitative Analysis of Developing and Developed Countries Using Panel Causality, Panel VECM, Panel Cointegration and SURE

The present study is an attempt to test the relationship between energy consumption and economic growth for developed and developing counties. For this purpose, panel data on various factors of GDP growth has been taken for 18 developing and 18 developed countries from 1980–2013. The paper uses the variant of Solow model to provide the economic justification behind the econometric estimation of regression model which includes energy consumption as one of the independent variables affecting GDP growth of a country, among others. The paper also runs a separate regression model for developed and developing countries to compare the effect of energy consumption on economic growth. To estimate the regression model, study uses various panel data estimation methodologies such as: panel data cointegration, panel causality, panel VECM, panel VAR and panel data ARDL and SURE to find out the short run and long-run relationship between the policy variables. The overall conclusion emerges from the analysis is that per capita energy consumption has a negative impact on growth of per capita GDP in developing countries but positive impact in case of developed countries. This may be due to the fact that in developed nations, the energy consumption expenditures may be more devoted to technological progress in alternative source of oil like shell gas or in expenditures related to renewable energy intensive technological products. The developing countries although trying to put efforts in increasing expenditures in alternative energy sources like non renewable, oil consumption still seem to not have many alternatives sources of energy. Therefore, reducing oil expenditures tend to promote growth among developing countries. The paper tests the direction of causality between energy consumption and GDP for set of developed and developing countries by working on the following hypotheses Neutrality hypothesis, which holds that there is no causality (in either direction) between these two variables. Energy conservation hypothesis, which holds that there is evidence of unidirectional causality from GDP growth to energy consumption. Growth hypothesis, energy consumption drives GDP growth. Feedback hypothesis, which suggests a bidirectional causal relationship between energy consumption and GDP growth. Growth, energy conservation and feedback hypotheses tend to work for developed and developing countries.