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“Economic Growth and Energy Consumption in G7 Countries: MS-VAR and MS-Granger Causality Analysis,” by Melike Bildirici

“Economic Growth and Energy Consumption in G7 Countries: MS-VAR and MS-Granger Causality Analysis,” by Melike Bildirici

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This paper uses Markov-Switching vector autoregression (MS-VAR) models and Markov-Switching Granger (MS-Granger) causality analysis to assess the relationship between energy consumption and economic growth for G7 countries (Canada, France, Germany, Japan, Italy, the United States, and the United Kingdom). The MS-VAR and MS-Granger causality approaches were utilized to evaluate causality under three different economic regimes (high growth, moderate growth, and recessionary) of the business cycle. MSIA(3)-VAR(.) models were selected for Canada, France, Italy, and the United States, while MSIAH(3)-VAR(.) models were chosen for Germany, Japan, and the United Kingdom. According to the author’s results, some evidence was found of bi-directional Granger causality between energy consumption (EC) and gross domestic product (GDP). For Japan, GDP was not found to be the Granger cause of EC in the high growth regime; however, overall, there was a bi-directional Granger causality relationship between energy consumption and GDP. There is evidence that supports the growth hypothesis for Italy, Japan, and the United States. The conservation hypothesis was best supported by the results for Canada and France. Last, the neutrality hypothesis was supported by the evidence from Germany and the United Kingdom. Furthermore, this paper offers recommendations on what energy policies would be best suited for implementation with the least effect on economic growth for the G7 nations. (This article was published int he Journal of Energy and Development as Melike Bildirici, “Economic Growth and Energy Consumption in G7 Countries: MS-VAR and MS-Granger Causality Analysis,” The Journal of Energy and Development, volume 38, number 1 (autumn 2012, copyright 2013), pp. 1–30.)
This paper uses Markov-Switching vector autoregression (MS-VAR) models and Markov-Switching Granger (MS-Granger) causality analysis to assess the relationship between energy consumption and economic growth for G7 countries (Canada, France, Germany, Japan, Italy, the United States, and the United Kingdom). The MS-VAR and MS-Granger causality approaches were utilized to evaluate causality under three different economic regimes (high growth, moderate growth, and recessionary) of the business cycle. MSIA(3)-VAR(.) models were selected for Canada, France, Italy, and the United States, while MSIAH(3)-VAR(.) models were chosen for Germany, Japan, and the United Kingdom. According to the author’s results, some evidence was found of bi-directional Granger causality between energy consumption (EC) and gross domestic product (GDP). For Japan, GDP was not found to be the Granger cause of EC in the high growth regime; however, overall, there was a bi-directional Granger causality relationship between energy consumption and GDP. There is evidence that supports the growth hypothesis for Italy, Japan, and the United States. The conservation hypothesis was best supported by the results for Canada and France. Last, the neutrality hypothesis was supported by the evidence from Germany and the United Kingdom. Furthermore, this paper offers recommendations on what energy policies would be best suited for implementation with the least effect on economic growth for the G7 nations. (This article was published int he Journal of Energy and Development as Melike Bildirici, “Economic Growth and Energy Consumption in G7 Countries: MS-VAR and MS-Granger Causality Analysis,” The Journal of Energy and Development, volume 38, number 1 (autumn 2012, copyright 2013), pp. 1–30.)

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05/15/2014

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THE JOURNAL OF ENERGY AND DEVELOPMENT
Melike Bildirici,
“  
Economic Growth and Energy Consumption in G7 Countries: MS-VAR and MS-Granger Causality Analysis 
 ,”  
 
Volume 38, Number 1 Copyright 2013
 
ECONOMIC GROWTH AND ENERGYCONSUMPTION IN G7 COUNTRIES: MS-VAR AND MS-GRANGER CAUSALITY ANALYSIS
 Melike Bildirici
*
 Introduction
S
tandard macroeconomics textbooks consider capital and labor as inputs intheir production functions, but not energy.
1
However, in the aftermath of thefirst energy crisis of the 1970s, economists began to pay greater attention to en-ergy. Energy does not appear explicitly on the payments side of national accounts.The payments to ‘‘energy’’ is equated to revenues of certain industries, such ascoal mining, petroleum and gas drilling (and value added in refining), and elec-tricity generation and distribution. Using this approximation, it turns out thatenergy’s ‘‘share’’ of payments in industrial countries is negligible—accounting, inmost cases, to not more than a few percentage points of a nation’s gross domestic product (GDP). Most economists in the past have assumed that energy could not be very ‘productive’relative to the traditional variables of capital or labor,depending on the income allocation theorem. To address this dilemma, it wasassumed that energy is an intermediate product of the economy. Thus, capital and labor produces the output and energy serves an intermediate role as it is converted 
*Melike Bildirici, Professor at the Yildiz Technical University in Istanbul, Turkey, holds a B.S.from Marmara University (Istanbul) and earned both his M.A. and Ph.D. degrees in economics fromthat institution. Dr. Bildirici’s studies have appeared in such publications as
 The Journal of Energyand Development 
,
 Expert Systems with Applications
,
 Energy, Family History
,
 Energy Economics
,
 JRSE 
,
 AEID
,
 Economic Research
,
 Emerging Markets Finance and Trade
,
 The International Journal of Applied Econometrics and Quantitative Studies
,
 JESR, METU Studies in Development 
,
 YKER
,and 
 IIF 
.The author wishes to thank Helen El Mallakh for her assistance and contributions.
The Journal of Energy and Development 
, Vol. 38, Nos. 1 and 2Copyright
 
 2013 by the International Research Center for Energy and Economic Development(ICEED). All rights reserved.
1
 
into products and output. However, economic growth cannot be explained by thesimple accumulation of invested capital, still less by a growing labor force sincethe 1950s. Many of today’s models of long-term economic activity assume thatchanges in the supply of energy or the demand for energy services have no sig-nificant impact on economic growth.
2
However, economic growth cannot be explained by the simple accumulation of invested capital and a growing labor force since the mid-20th century. Many of thecurrent models of long-term economic activity assume that changes in the supplyof energy or the demand for energy services have no significant impact on eco-nomic growth.
3
This paperchallenges theassumptions about energy put forthin many orthodoxmacroeconomics textbooks because the experiences of developed countries showthat energy does indeed play a crucial role in their economic development, notonly as a key input in industrial development but also as a salient factor in im- proving the quality of life for their citizens.
4
R. Ferguson et al. found that there isa strong correlation between increases in wealth over time and increases in energyconsumption.
5
For this reason, the relationship between energy and economicgrowth is imperative for developed and developing countries.
6
The papers focused on energy can be divided into two main categories: thosedealing with the production function and those pertaining to the relationship be-tween energy consumption and economic growth.The first group of papers also utilize energy consumption but their approachfocuses on the evaluation of energy consumption by incorporating it as one of theimportant factors of production in addition to capital, labor, and factors such asraw materials and technology. One example of this is the work by R. Rasche and J. Tatom, who analyzed a model derived from a specified production function withvariablesrelatedtoenergy,land, labor,andcapital fortheUnitedStates.
7
Accordingto their result, the increases in energy prices lead to negative impacts on the grossnational product (GNP) of the country.The second group of studies investigate the energy consumption by evaluatingit as a measure of economic growth. The second category of research examinesincome elasticity—the price elasticity of electricity demand and Granger causality between energy consumption and economic growth. Notable among the elastici-ties group are the works of H. Houthakker, F. Fisher, and C. Kaysen; R. Baxter and R. Ress; H. Anderson; H. Houthakker and L. Taylor; J. Wilson; T. Bakırtas
x
,S. Karbuz, and M. Bildirici; and M. Bildirici and T. Bakırtas
x
.
8
The group in-vestigating the relationship between energy consumption and economic growthwithin the context of causality analysis consists of J. Kraft and A. Kraft; E. Berndt;A. Akarca and T. Long; E. Yu and B. Hwang; E. Yu and J. Choi; and U. Erol and E. Yu.
9
Much academic research has gone into assessing the causal relationship be-tween energy consumption and economic growth. The pioneers in this realmTHE JOURNAL OF ENERGY AND DEVELOPMENT2

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