Is energy a stimulus for economic growth? A focused study on Malaysia using the auto regressive distributed lag technique

It is without doubt that a country’s economic growth is important to ensure the well-being of its population as well as the country’s accreditation of its own economic standing to the world. With time, economic growth is often associated with the consumption of energy. Being the aim of any country to characterise itself with sustainable development, energy becomes prevalently abused to the extent of the considerable consequences we are experiencing today. However, it is uncertain whether it is the abusive energy consumption that results the economy to grow favourably, or is it the economy that leads to consuming energy in the first place. The conservation hypothesis, growth hypothesis, feedback hypothesis and neutrality hypothesis each explains this causal relationship differently. Previous studies have been done on finding the causality between the two, many using co-integration and vector error correction modelling techniques but the results are still mixed. In this study, we intend to apply the Auto Regressive Distributed Lag (ARDL) technique to investigate the issue at hand in the case of Malaysia for the period of 1971-2012. Malaysia is a good reference for a country which has grown and developed progressively in the Asian region, with its abundance of natural oil and gas as the main drivers of energy sources for the country. Our study brings us to the finding of a unidirectional causality running from economic growth to energy consumption. We also take note on the weak causality from economic growth and energy consumption to energy price. Thus, with the unidirectional finding from economic growth to energy consumption, policy makers are able to formulate effective measures for energy conservations without affecting the economic growth of the country.