INTRODUCTION
1.0. Overview
Energy is essential to the quality of lives of any living organism. The importance and
indispensability of energy can not be overemphasized. From microchips to cars, air
conditioning to water heating and pharmaceuticals to plastics, energy is part of people's
daily lives. Existing in many forms, energy is used in virtually every sector of every
economy; these include agriculture, manufacturing, military, construction, education,
and computing and health sectors. Therefore energy is considered one of the major
driving forces for economic growth and development. As technology advancements
occur, energy becomes increasingly accessible to more and more people and global
consumptions increases.
In 2008, the world consumed approximately 85 million barrels of oil per day (Smith,
2009). The AsiaPacific region has the most rapidly growing energy demand in the
world and will continue to have an increasing impact on world energy demand
(Intarapravich et al., 1999). The use of conventional energy like oil, coal and electricity
has increased enormously in the last 25 years in ASEAN economies. In fact, during the
1980s consumption more than doubled, with an average annual growth rate of 7%
(Luukkanen & Kaivooja, 2002). For Malaysia, from 2004 to 2030 total primary energy
consumption and carbon emissions are projected to triple (Gana & Lib, 2008).
Another popular energy issue is the pollution concern. Energy consumption, especially
fossil fuel, is mostly associated with carbon emission and environmental degradation.
Gana and Lib (2008) estimate that Malaysias 2004 CO2 emission figure will triple by
2030 largely due to primary energy consumption.
These drastic scenarios have led many economists and analysts to believe that global
energy demand is not sustainable in the long run. It has also prompted many countries to
begin to actively search for effective ways to accurately predict and manage energy
consumption.
Energy issues of paramount importance in almost every country. Most countries are
beginning to address the issue of energy wastage by drafting and implementing
roadmaps toward energy efficiency. For Instance, in 2002, Singapore launched its
Green Plan. One of the 6 core aims of this plan is to reduce carbon emission by
2
reducing energy intensity (energy consumed per dollar GDP) to 25% from 1990 to 2012.
Singapores is a success story because by 2011, Singapore had exceeded its target. Now,
in its Sustainable Development Blueprint Singapore has set another set of targets to
further reduce its energy intensity by 20% from 2005 levels by 2020 and by 35% from
2005 levels by 2030.In the same manner, the Malaysian government is seeking to
intensify the adoption of renewable energy, particularly biomass, through it Fuel
Diversification Policy (FDP). FDP was set out in 2001. One of its objectives is to
increase the share of renewable energy in the aggregate energy produced. That is,
renewable energy will provide 5% of electricity generated by 2005; this was equal to
between 500 and 600 megawatt (MW) of installed capacity as at 2001. (Business
Monitor International , 2008). This policy has been reinforced through fiscal incentives,
such as investment tax allowances and other programme; e.g. the Small Renewable
Energy Programme (SREP) and Energy Efficiency Award (EE) (Manan, et al., 2010).
Income and credit are the two main sources of finance for firms and households for
financing their expenses. Loosely put, when firms or individuals experience increase in
real income their purchasing power increases too. This is the underlying principle behind
the purchasing power theory. Extending this principle, it is also logical that as the
amount of credit made available to firms and households increases, their purchasing
power increases too (at least in the borrowing period).
3
There are at least two ways finance influence energy consumption in a country. First is
through income. Many empirical works support that financial developments cause
economic growth (see, for example, Beck et al., 2004; Fung, 2009; Levine, 1997 and Liu
& Hsu, 2006). Theory also supports that economic growth increase disposable incomes
and, as a result, implies higher demand for goods and services. This demand may
include demand for energy consuming gadgets such as automobiles and household
appliances. Similarly, due to higher demand for goods and services, businesses might
gradually increase production by building new plants and acquiring more machinery,
thereby consuming higher amount of energy.
Northeast Asia has vastly increased regional needs for energy services (Hippel et al.,
2009). A quick glance at data (see figure 1.1) shows that income and energy
consumption appear to have similar growth trends in Malaysia.
Figure 1.1: Energy consumption per capita and Income per capita for Malaysia from
1960 to 2008.
6,000
5,000
4,000
3,000
2,000
1,000
0
1975
1980
1985
1990
ENERGY
1995
2000
2005
INCOME
The second medium, through which finance can influence energy demand, is through
credit creation. As banks and other credit issuing financial institutions grow, the amount
money available for loan (e.g. deposit money bank assets) increases. Therefore, financial
development, through bank sector growth, affects energy consumption by making it
easier for firms and households to borrow money to buy energy consuming goods like
automobile, machineries and electrical appliances which consume plenty of energy
(Sadorsky, 2011). Table 1 presents a summary of the growth rate of energy price, bank
deposit and energy consumption for Malaysia.
Table 1.1: Average annual growth rate of key variables in percentages 19712008.
Energy
consumption per
capita
Weighted oil
price/CPI
4.38
3.92
6.00
2.28
Note: Average annual growth rate is estimated using the formula (last year / first year) exp ((1/number of
years) 1) x 100. Real GDP per capital base year is expressed as a constant of 2000.
Energy consumption per capital expresses the average amount of energy each person
consumes in Malaysia, Real GDP per capital represent average income per person in
Malaysia, weighted oil price/CPI proxies energy price while deposit money bank
asset/GDP measures the amount of deposit commercial bank is able to accrue for every
domestic product in Malaysia.
Recently, World Bank (2012) ranked Malaysia regulatory environment as one of the
most conducive for getting credit. However, till date, energy demand modelling has been
done in view of very few economic variables of which the most weight is given to
income (see, for example, AlIriani, 2006; Kraft and Kraft, 1978; Lee and Chang; 2006a;
Masih and Masih, 1996; Tsani, 2010 and Ozturk et al., 2010.) Other factors such as
energy price (especially crude oil price), and industrial output growth have been
considered as well. Despite its popularity, existing models have not been able to fully
7
explain energy consumption. In view of this, more reflections and directions are needed
in this research area (Karanfil, 2009). Should credit, as well as income, be considered
while modelling energy demand for Malaysia? To answer this question, this study looks
into the effects of income and access to credit on energy consumption in Malaysia.
Logically, firms consume more energy when they expand their operations such as
building new production plants and buying more machines. Similarly, households or
individuals would consume higher amount of energy when they purchase energyconsuming appliances and machines such as automobiles, air conditioners and lawnmowers. Therefore, one could intuitively state that easy access to funding may increase
the amount of aggregate energy consumed in an economy. Despite the simplicity and
rationality in the aforementioned connections (hypotheses), less is known on the
relationship between income and energy consumption, and even less is known on that
between credit and energy consumption in Malaysia. Published work on this subject is
relatively minuscule.
The general objective of this study is to test whether credit and income should be
considered when modelling energy demand for Malaysia.
ii.
iii.
The relationship between income and energy demand has received a relatively more
substantial attention in the literature. Perhaps, an equal amount of work has been
dedicated to the study of income and green house gas emission. However, very little is
known about the nature of the interaction between credit and energy consumption in
Malaysia.
A model that accurately forecasts demand for energy will be very useful for policy
markers and the private stakeholders. Identifying the economic variables that influence
energy demand will help policy makers to appropriately tackle the energy issues and
enhance sustainable energy consumption in Malaysia. Thus, this study verifies whether
income and credit are valid variables to be considered when modelling energy demand
for Malaysia.
The body this study begins in chapter 1 Introduction. Chapter 2 Literature review is
where theoretical framework is explained, past researches are reviewed and the gap in
the literature is identified. Chapter 3 Methodology describes the econometric methods
of analysis used. Chapter 4 Data analysis and findings explains the results are
presented and explained, and Chapter 5conclusion and policy recommendationscontains the conclusions drawn from the entire research, and recommendations for
policy makers consideration.
10
CHAPTER 2
LITERATURE REVIEW
2.0 Introduction
Reviewing existing literatures helps us get a good grasp of how much work has been
done on the determinant of energy consumption and identify the gaps that exist. It also
helps in the variable selection process. This chapter contains theoretical framework and
empirical literatures in 2.1 and 2.2, respectively.
Regarding the possible impact of credit and income on energy demand, there are at least
two related economic theories the lifecycle hypothesis and the Keynesian
consumption theory. These two economic concepts form the bases for this study.
11
2.1.1 The lifecycle hypothesis (LCH) and the Keynesian consumption theory
The lifecycle hypothesis (LCH) can be used to explain theoretically, the impact of
income and credit on spending. This theory was propounded Modigliani (1966).
Modigliani (1966) observes that people make consumption decisions based on the
resources available to them over their lifetime. LCH argues that consumers should
intertemporally relocate their income over their life time to maximize lifetime utility. In
other words, consumers intend to even out their consumption in the best possible manner
over their entire lifetimes. There are two form intertemporal allocations: saving and
borrowing. Savings involve the use of past income in the future. Conversely, borrowing
involves the spending of future income now. The spending of future income can only be
done if consumers have access to temporary pool of money that they can draw from and
replenish in the future a function performed by consumer credit (Soman & Cheema,
2002).
Let consider a case of a single consumer. Assume that a consumer expects to leave
another T years, has wealth of W and earns income Y until he retires R years from now.
His lifetime income will be RY. We assume interest rate and tax to be zero. If interest
rate is positive, we will have account for interest earn on savings and interest paid on
borrowing. Assuming he earns, save and borrow at the beginning of the year
12
(1)
W* = W + S and Y* = Y  S
Where W* is the wealth balance in a given year while W is the previous years balance.
Y* is current year income plus savings and C is annual consumption. In a given year, if
saving is negative, the consumer spends from his wealth. But if wealth is zero and
savings is negative, it implies that the consumer borrows. Therefore S can be savings,
dissaving or credit; depending on the sign on S and whether W is less than or equal to 0
or otherwise. S has an off setting implication on both wealth balance and disposable
income.
(2)
Where = 1/T (marginal propensity to consume from wealth) and = R/T (marginal
propensity to consume from income). For the purpose of this study, to effectively
account for credit, we restrict W equal zero and S to be negative.
13
Thus, W* =  S = D
(3)
C = a + cYd
(4)
Consistent with these theories is that a consumer will consume more energy when his
income or access to credit increases or both occurs.
14
Despite the simplicity and rationality, the subject on the relationship between credit and
energy consumption seem to receive very little attention in the literature.
Credit serves to augment household current purchasing power at the expense of future
income. Hirschman (1979) compares the volume of consumprion made by consumer
who paid by credit and those who used cash and found that those hwo used credit
consume more than those who paid cash. In the same vein, Feinberg (1986) investigate
the role of credit card in stimulating holders to spend more. He finds that the credit card
indeed facilitates more spending.
Soman & Cheema (2002) studies the effect of credit on spending decisions. Their focus
was more on the moderating role of credit limit and credibility. They argue that
consumers who are granted lower amount of credit are likely to infer that their future
income will be low and consequently their spending will be low. This implies that an
average consumer believes the lending institution accurately predicts their future
income. However, as the consumer gains experience over time, they begin to question
the credibility of these institutions, thus the effect of limit and credibility, on
consumption, falls.
15
Cosistent with these findings is that the availabilty of credit will encourage inviduals and
firns to perform transactions that may lead to more energy demand.
Also, in an economy with financial development, Individuals and firm are able to access
credit from lending institutions at very competitive cost of borrowing rate.
Financial development (a measure of credit availability) can affect the demand for
energy by making it easier for consumers to borrow money to buy big ticket items like
automobiles, houses, refrigerators, air conditioners, and washing machine (Sadorsky,
2010). Also, businesses also benefit from improved credit availability because it
provides additional funds which can be used to expand existing businesses. These
expansions, such as building new plants and buying new machineries, may lead to to
higher demand for energy.
The amount of published works on the relationship between financial development and
energy demand is minuscule. Tamazian and Bhaskara (2009) study the impact of
financial and institutional development on environmental degradation in twentyfour
transition economies. They use the standard reducedform modelling approach to control
for countryspecific unobserved heterogeneity and Generalized Method of Moment
(GMM) estimation to control for endogineity. Their result reveals that an financial
developments, particularly financial liberalization and foreign direct investment, do play
16
Sadorsky (2010) collects data for twentytwo emerging economies, including Malaysia
for the period 1990 through 2006. Using Panel GMM estimation technique, he finds that
stock market development affect energy consumption but bank development does not
have the same effect in emerging economies. Similarly, Sadorsky (2011) studies the
relationship between financial development and energy consumption in nine European
frontier economies. One of the variables used to proxy bank development is the ratio of
money bank asset to GDP. His results reveal that development in the banking sector has
a positive and statistically significant relationship with energy consumption when
financial development is measured using the ratio of money bank asset to GDP. Zhang et
al. (2010) also examines the influence of China's stock market development on energy
consumption using the Grey Relational Analysis and Granger causality test approach.
They find that China's stock market scale enlargement is a factor of energy consumption.
Also, Shahbaz and Lean (2012) find a longrun bidirectional relationship between
17
The study of the interactions between income and energy demand is pioneered by Kraft
and Kraft (1978). Kraft and Kraft (1978) study the relationship between economic
growth and energy demand during the post world war II era. At the time, it was
popularly held that energy consumption is one of the chief drivers of economic growth
and the campaign for energy conservation began. However, Kraft and Kraft (1978)
debunked this thought. They find no evidence to supports the claim that energy
consumption causes economic growth. However, economic growth does cause energy
consumption. Recent studies have bolstered this finding. For example, using
cointegration and error correction model (ECM) to study cases for Singapore, Malaysia
and Philippines, Masih and Masih (1996) find that the causality flow from economic
growth to energy consumption in all three countries. Also, AlIriani (2006) presents a
case for six Gulf cooperation council (GCC) countries. He finds that a unidirectional
causality running from economic growth to energy consumption exists in this region.
For Greece, Tsani (2010) finds that, at disaggregate level, real GDP does cause
industrial and residential energy consumption. Similarly, Ozturk et al. (2010) use an
augmented panel cointegration method to study a panel of 52 countries, comprising low
18
income, lower middle income and upper middle income economies. Their results reveal
that economic growth causes energy consumption in lowincome and middle income
countries. Other researches that bolster the finding of Kraft and Kraft (1978) include, but
are not limited to, (Huang et al. 2008), (Lee and Chang, 2007), (Mehrara, 2007), and
(WoldeRufael, 2005). However, more reflections and directions are needed in this
research area (Karanfil, 2009).
Establishing that economic growth can cause energy demand and that financial
development can cause economic growth; see, for example, Ang and McKibbin (2007),
Hao (2006), Hasan et al. (2009), Liu and Hsu (2006), McKinnon (1973), Oura (2008)
and Yang and Yi (2008). Consistent with these views is the likelihood that bank
development influences energy consumption.
In most economies, the price of energy seldom follows the theoretical demand and
supply interactions, because it is heavily controlled by the governments. This reflects
that policymakers understand the possible dire effect volatility in global energy price can
cause on important macro variables.
19
The relationship between energy price and energy consumption has been studied by
many researchers. For example, Gouda (1988) attempts to obtain the price and income
elasticities of energy demand in Egypt, and observed that between 1971 through 1981
energy consumption rose by about 50% while energy price fell staedily.
While their focus was on energy price and inocme, Nesbakken (1999) tests the stability
of the results of a model which focus on the relationship between the choice of heating
equipment and the residential energy consumption in Noway. His result shows that the
energy price sensitivity in residential energy consumption is found to be higher for highincome households than for lowincome households. In the same vein, Brons et al.
(2008), use seemingly unrelated regression (SUR) approach to determine the price
alasticity of gasoline demand. Their model allows for the price elasticitties of total fuel
demand and that of fuel effeciency to be linearly related. Brons et al. (2008) empirical
result suggest that gasoline price and the demand for it are negatively related with price
elasticities of 0.34 and 0.84 in the shortrun and longrun respectively. Sadorsky
(2009) investgates the whether price of oil affects and CO2 emissions affects the demand
for renewable energy in the G7 countries. Using a panel cointegration approach, he finds
that Oil price increases have a small and negative impact on renewable energy
consumption. Yuan et al. (2010) study the relationship between energy price and energy
demand in China, using ointegration equations, impulse response functions, granger
causality and variance decomposition. their result shows that increase in energy price
will decrease energy demand in both the industrial and household sectors of China. They
conclude that reasonable increase in energy price will save energy.
20
CHAPTER 3
METHODOLOGY
3.0 Introduction
The purpose of this chapter is to describe the data and the methods of analysis used in
this study. It is important to note, at this juncture, that this study is empirical in nature.
This study uses annual data on energy consumption, financial development, energy
price, and income for Malaysia from 1971 through 2008 (38 observations). Time period
selection is based on data availability.
21
3.1.1
Dependent variable
3.1.2
Independent variables
3.1.2.1 Income
The relationship between income and energy demand is perhaps the must investigated
aspect of this subject matter. Increase in a consumers real income is expected to
increase his energy demand by incraeasing the consumers purchasing power. Income
22
per capita (hencforeth y) is included in the energy demand model. The proxy for income
is real GDP per capita, measured in constant 2005 international dollars. Income data is
available from World Bank World Development Indicators online database.
3.1.2.2 Credit
Studies have shown that consumers willingnesstopay increases when they are require
to pay using a credit card rather than cash (see for example Prelec & Simester, 2001 and
Soman & Cheema, 2002). When credit becomes more available, consumers purchasing
power increases. Even the most prudent consumer who might use credit cards only
for purchasing longlived products or just for convenience may occasionally get
tempted and spend out of their credit limits (Soman & Cheema, 2002). The pruchase of
machineries, car, houses etc, could increase an individuals or
firms enrgy
consumption.
All over the literature, the varibles used to measure credit are very similar to those used
to measure bank sector development (for example, Beck, et al., 1999; Beck & Levine,
23
2004; Ang & McKibbin, 2007 and Sardosky, 2010). This is so because banks are an
inportant source of credit for firms and households . Thus measuring development in the
banking sector implies measuring the availablity and accesibilty of credit.
Two measure of credit are used. They are Private Credit By Deposit Money Banks And
Other Financial Institutions / GDP (henceforth, PC) and Domestic credit to private
sector % of GDP (henceforth, DC). DC is the financial resource provided to the private
sector, such as through loans, purchases of nonequity securities, and trade credits and
other accounts receivable. The data series are available at World Bank World
Development Indicators online database. PC is very similar to DC however it is the
claim on the private sector by deposit money banks and other institutions. PC often
argued to be a more superior measure of efficient credit allocation. Since the private
sector is able to utilize funds in a more efficient and productive manner as compared to
the public sector, the exclusion of credit to the public sector better reflects the extent of
efficient resource allocation (Ang & McKibbin, 2007). The PC series is obtainable
from Beck and DemirgKunt (2009).
24
Just like any other essentiasl comodity, the price elasticity of energy is expected to be
near zero. Following several studies such as Masih and Masih (1996) Aknlo (2008) and
Sadorsky (2010), this study includes energy price in the model to minimize simulteneity
biases in estimations. As at the time of this report, domestic energy price for Malaysia
are not accessible. To amake sure that the effect of energy price is accounted for, most
researchers use the consumer price index (CPI) as a proxy for domestic energy price.
Other use international oil prices (for example Sardosky, 2010). However recent work
by Sardosky (2011) shows that discounting international oil price by domestice CPI
might reflect similar trend with the domestic energy price. Therefore, borowing a laef
from Sardosky (2011), this proxy for energy price (henceforth, P) is generated by
dividing world oil by Malaysian cpi. The intertional oil price is used is the average
wieghted oil prices. Weighted oil prices are measured using crude petroleum, average of
UK Brent (light),Dubai (medium), and Texas (heavy), equally weighted ($/barrel). This
is then divided by consumer price index (cpi, 2005=100). Data for consumer price index
is available from World Bank World Development Indicators online database while
weighted oil price is obtained from UNCTADstat.
25
3.2.1
Model Specification
Based on the aforementioned variables, the general model used in this study is as
follows
le= f(ly,lc,lp)
(5)
where le is energy use per capita, ly is real income per capita, lc is credit variable and
lp is energy price. All series are expressed in natural logarithm.
Cognizant to the fact that two variables are used to measure credit, equation one is
decomposed into
(6)
(7)
26
institutions /GDP and domestic credit to private sector % of GDP respectively equation
6 and 7 are model 1 and model 2 repestively.
3.2.2
27
This study uses two unit root test to ensure the robustness of the outcomes. The unit test
used are those proposed by
The NgPerron test construct four test statistics that are based upon the GLS detrended
series
statistics, the ERS Point Optimal statistic and the Bhargava (1986) R1 statistic.
(8)
28
(9)
(
)
(
(10)
Where
(11)
NgPerron test requires that a specific xt and a choice for estimating f0 . The nul
hypothesis for NgPerron testis that the series has unit root (i.e. nonstationary). If
stattistics is less than critical value, we reject null. Otherwise, we fail to reject null.
KPSS uses a null hypothesis that the series is trend stationary. Just like NgPeron test It
also requires an estimator of the residual spectrum at frequency zero, and a set of
exogenous regressors. The KPSS statistic is based on the residuals from the OLS
regression of yt on the exogenous variables xt :
29
yt = xt+t
(12)
(13)
Where f0 is an estimator of the residual spectrum at frequency zero and where S(t) is a
cumulative residual function:
(14)
Now, based on this residuals t = yt xt(0). It is obvious that the estimator used in
this calculation differs from the estimator used by GLS detrending since it is based on a
regression involving the original data, and not on the differenced series. KPSS null
hypithesis is that the series is stationery. When the LM test statistic is greater than
critical value, we reject null hypothesis. Otherwise, we fail to reject null. The reported
critical values for the LM test statistic are based upon the asymptotic results presented in
KPSS (Table 1, p. 166).
30
3.2.3
After the test for stationarity, if all variable are integrated of order 1, then we may
proceed to investigate whether there is cointegrating vectors among the variables using
JJ test for cointegration. Howewever, it is important that we select the optimal lag
length for the equations. Although many studies use either the Akaike Information
criterion or the scwartz informatjion criterion, this studies uses a different and more
profficient approach. Fisrt, we run the equation in a VECM framwork, starting with lag
1. They residual of this regression is tested for autocorrelation. If serial correlation
foiund, we rerun the regression but this time we increase lag to 2. This continues
iteratively until we find the lag level at which the error term of the equation are devoid
of serial correlation. This lag level thus becomes the selected lag length
3.2.4
Cointegration test
Once the optimum lag length is determined, we proceed to test for the presence of
cointegrating vectors in our model using the cointegration test propoosed by Johansen
and Juselious (1990) (JJ test). Suppose a set of 3 variables, are verified to be I(1)
variables. let Zt be the vector for all 3 variables. Therefore a Vector Autoregressive
with k lags could be generrated VAR(k).
31
(15)
In order to use JJ test the VAR (k) must be transformed into a VECM as follows
Where
(16)
(17)
And
(18)
32
Where r is the number coimtigrating vectors and i is the estimate value for the ith
ordered eigenvalue from the matrix. A significant nonzero eigen value indicates a
sugnificant cointegration vectior.
when
, wher I = 1n.
all the
and
H2: r
H3: r
These hypothesis are tested sequencially. In other word, one fail to reject H0 , one stops
there and draw conclusion that there are no cointegrating vectors. However, if H0 is
rejected, then H1 is tested. This continues until one fail to reject one hypothesis.
Rejecting all 4 hypothesis will imply a full rank of . This result is invalid becuase the
number of cointegrating vectors (r) must be less than the number of variables in the
system.
33
3.2.5
Causalities
The test for cointegration reveals whether a systematic comovement exists among the
variabes in the long run. According to Engle and Granger (1987), if X and Y are both
nonstationary, a linear combination of X and Y would be a random walk. However, the
two variables may have the property that a particular combination of them Z=XbY is
stationary. If such a property holds true, we say that X and Y are cointegrated. If X and
Y each are nonstationary and cointegrated, then any standard Grangercausal
inferences will be invalid and a more comprehensive test of causality based on an errorcorrection model (ECM), should be adopted (Engle and Granger, 1987). One major
drawback of standard Granger causality is that it requires a differencing filter to be
included to variables that have nonstationarity propensity. Meanwhile, differencing
essentially removes any of the longrun information that can be of crucial importance to
policy designers (Masih & Masih, 1997).Therefore, ECM based granger will be used for
shortrun causality inferences.
For testing longrun causilty, this study uses a new and more robust causality test
proposed by Toda and Yamamoto (1995) (hereafter, TY Granger). Toda and Yamamoto
(1995) identifies that, for d=1, the lag selection method is always applicable since k >
1=d. If d=2, then the method is valid unless k=1. The result of this method is valid
regardless whether a series is I(0) or I(1), cointegrated
(19)
3.2.6
For estimiting longrun elasticties, this study uses the procedure proposed by StockWatson (1993) known as Dynamic Ordinary Least Square (DOLS). The DOLS
procedure allows for cointegrated variables as well as tackling the problem of
35
simultaneity amongst the regressors. DOLS performs well in handling small sample size
analysis. Provided all series are I(1) and are cointegrated. The potential of simultaneity
bias and small sample bias amongst the regressors is dealt with by the inclusion of
lagged and led values of the change in the regressor. The DOLS procedure follows
Where yt is the dependent variable, X is the matrix of all the independent variables. k is
the optimum lag and lead. is the coffeicient of the vector of lag and lead differenced
dependent variables. This lag and lead term included in DOLS regression have the
purpose of making its stochastic error term independent of all past innovations in
stochastic regressors. Lag and lead are selected based on Swartzt information criteria
(SIC).
3.2.7
According to Masih & Masih, (1997), unless the analytical tools used account for the
"dynamics" of the relationship within a temporal "causal" framework, the complexity of
the interrelationships involved may not be fully captured. The
cointergration and
Granger causality tests used in this study only indicate the exogeneity or endogeneity of
36
the variables and suggest the direction of causality within the sample period. However,
they do not provide us with the dynamic properties of the system in postsample period.
Therefore, the analysis of the dynamic interactions among the variables in the postsample period is conducted using variance decompositions and impulse response
functions. Impulse response functions effectively map out the dynamic response path of
a variable (i.e. income)over a selected period of time, due to a one Cholesky standard
deviation innovation of another variable (say, credit).
37
Chapter 4
4.0 Introduction
This chapter is the crux of this research. It presents the empirical analyses, results and
discusion of results. First, we performed some basic tests, i.e. descriptive statistic and
pair wise correlation analysis before proceding with other test. Overall, about seven
analytical tools were applied. These inludes; two unit root tests, a test for cointegration,
shortrun Granger causality test in VECM framework, DOLS for obtaining longrun
equation and two methods to catch a glimpse of
The
interpretations of each test result are also detailed out under each subtopic.
Some important features of each of the data series are presented in table 4.1. This gives
a general overview of each series used in this study.
38
ly
lp
ldc
lpc
Mean
7.118811
7.868220
1.174513
4.314371
0.332154
Median
7.067863
7.831390
1.204641
4.532079
0.121323
Maximum
7.898389
8.531688
0.139142
5.068904
0.439888
Minimum
6.231607
7.069023
2.351607
3.044522
1.504334
Std. Dev.
0.515755
0.430829
0.542367
0.592640
0.576030
Skewness
0.217015
0.139995
0.172754
0.745159
0.734648
Kurtosis
1.819764
1.787883
2.840479
2.300916
2.212541
JarqueBera
2.503785
2.450401
0.229303
4.290467
4.399958
Probability
0.285963
0.293699
0.891677
0.117041
0.110806
Sum
270.5148
298.9924
44.63150
163.9461
12.62184
6.867710
10.88401
12.99521
12.27697
Observations
38
38
38
38
38
39
The median of a series will be higher than it mean if the series is negatively sloped and
vice versa. All series, except lpc and ldc have mean higher than their medians.
Kurtosis measures how outlierprone a distribution is, that is the possibility of that one
of the observations deviate markedly from other members of the sample in which it
occurs. The kurtosis of the normal distribution is 3. Distributions that are more outlierprone (probability of deviating markedly) than the normal distribution have kurtosis
greater than 3; distributions that are less outlierprone have kurtosis less than 3. None of
the variables have Kurtosis more than three. This implies that during our observation
period, there was no significant and sudden drop or rise in any variable. It also implies
that all variable rise and fall slowly over time.
Also, JarqueBera (JB ) test is used to measure the series departure from normality.
Hence it is a goodnessoffit test based on the sample kurtosis and skewness. The null
hypotheis for JB test that a series is normally distributede. The JB probability values
fail to reject null hypothses for each data series. Therefore all series are normally
distributed.
This preliminary correlation test weakly estimates how interelated the variables are.
Table 4.2 present the pairwise correlation result.
40
ly
lp
lpc
ldc
le
ly
0.994
lp
0.283
0.285
lpc
0.907
0.898
0.157
ldc
0.909
0.810
0.168
0.996
Each series was tested for short run correlations in relations to the other series. Pairwise
correlation shows the strength and directions of linear relationship between a pair of
series. However, correlation test does not rule out lurking variables (spurious
relationships1) The correlation result showed that in the energy and income move very
closely in the same direction. The two credit variables shows equally high correletion, in
the same direction, whith energy consumption. energy price has the lowest correlation
with energy consumption. lastly the correlation between the two credit variables (i.e.
lpc and ldc) is near pefect.
Spurious relationship is one in which two occurrences have no causal connection but appears to have
due to the presence of a third factor not included in the model thus, he spurious relationship gives an
impression of a worthy link between two groups that is invalid when objectively examined.
41
Most time series analysis begins with the test for staionarity. It is important to know the
order of intergration of variables in a study so that appropraite methods could be used
for futher anaylsis. Test for stationarity reveals the trend characteritics of each variable
in a model. According to DeJong, et al. (1992), the traditional ADF and PP tests are
known to have severe size distortion (in the direction of overrejecting the null) when
the series has a large negative moving average root. To avoid this bias, we use two
relatively novel and more stringent stationarity tests to verify the order of integration of
the variables. These tests are the NgPerron and KPSS test proposed by Ng and Perron
(2001) and Kwiatkowski et al. (1992) respectively.
4.3.1
NgPerron test
Table 4.3 presents the result of the NgPerron unit root test. The NgPerron test for
stationarity includes trend and constant for both level and first difference. The null
hypothesis is rejected when the tststistics is greater than the assymtotic critical value..
This critical values are provided in NgPerron (2001, Table 1). All the variables are nonstationary (i.e the contain unit root) at level. However, they are all stationery at first
diffrence.
42
First difference
MZa
MZt
MSB
MPT
MZa
MZt
MSB
MPT
ly
5.833
1.653
0.283
15.527
17.656**
2.971**
0.168*
5.163**
lp
4.719
1.466
0.311
18.847
17.947**
2.982**
0.166**
5.158**
le
11.010
2.316
0.210
8.425
17.104**
2.923**
0.171*
5.337**
lpc
4.732
1.295
0.274
17.761
17.085**
2.921**
0.171*
5.342**
ldc
1.270
0.410
0.394
36.787
17.979**
2.997**
0.167**
5.073**
Note: * and ** represent significance at 5% and 1% level respectively. Null hypothesis is that there is unit
root (i.e. nonstationary).
That is they are all I(1) variables. To verify that the results of Ngperron are valid,
KPSS test for unit root is used.
4.3.2
The null hypothesis for KPSS test is different from other unit root tests. Its null
hyptothesis is that a series is staionary. Each variable is tested twice in both level and
first differnce. First test includes only constant while the second inlcudes both constant
and trend. Table 4.4 presents the KPSS unit root test result.
43
First difference
Constant
Constant and
trend
Constant
Constant
and trend
ly
0.745***
0.083
0.151
0.060
lp
0.141
0.113*
0.162
0.161**
le
0.738**
0.119*
0.106
0.097
lpc
0.636**
0.196**
0.451*
0.070
ldc
0.635**
0.1782**
0.453*
0.059
Note: *, **, *** represents stationarity at 10%, 5% and 1% significance level. The
null hypothesis is that a series is stationary.
The KPSS result confirm that all variables are I(1). Howerver, the order of intergration
for both income (ly) and energy price (lp) are indistinct. Therefore, it is difficut to
confidently state their order of integrations. Before we proceed, a decision has to be
made regarding the order of integration of both income and price. To avoid making a
bad judgement, Augmented Dickey Fuller (ADF) and Phillip Perron (PP) tests are
adopted. Acording to the both PP and ADF tests in tables 4.5, all variables are I(1)s.
These correspond with the NgPerrons result. Therefore this study assume all variables
are I(1.)
44
1st Difference
ADF
PP
ADF
PP
le
2.692[0]
2.655(5)
7.374[0]***
8.329(7)***
ly
2.184 [0]
2.396(3)
5.077[0]***
5.037(2)***
lp
1.995[0]
1.995(2)
6.060[0]***
6.060(1)***
lpc
0.291(0)
0.486(1)
4.658[0]***
4.658(0)***
ldc
0.638[1]
0.594[3]
5.828(0)***
5.840(2)***
Note:*, **, *** represents 10%, 5% and 1% significant level respectively. The figure in bracket ()
represents the Bandwidth used in the PP test selected based on NeweyWest Bandwidth criterion. The
figure in parenthesis [] represents optimum lag length selected based On Schwarz information criteria
(SIC)
4.3.3
Following the proceedure described in chapter 3, section 3.3.3, we obtain the optimum
lag for both model. Using lag 1 for both model, the correlogram result show that there
is no autocorealtion in the resduals of the system up until lag 16. Using 5% significance
level as the benchmark. This implies that lag one is the optimal lag length for both
model and model 2. Schwarz Information Criterion (SIC) is used to corroborate this
report. Figures for both model up to lag 3. The SIC value for lag 1 is minimum. Table
4.6 contains the SICs of both model from lag 1 to lag 3.
45
Model 1
2.376
2.227
2.135
Model 2
2.392
2.279
1.993
4.3.4
Cointigration test
After obtaining the optimum lag base on level corellelogram and SIC, the test for longrun cointigration is performed. Test for cointegrating vectors reveal whether a set of
variables share similar longrun features.
MaxEigen
Statistic
Critical Values
(5%)
Trace
MaxEigen
Model 1
Model 2 Model 1
Model 2
r=0
48.554*
49.104*
29.036*
29.466*
47.856
27.584
r1
19.518
19.639
14.199
13.960
29.797
21.132
r2
5.319
5.679
5.096
5.643
15.495
14.265
r3
0.223
0.036
0.223
0.036
3.842
3.842
Note: * indicates significance at 5% level. Maximum lag length selection is based Schwarz
Information Criterion.
46
The amount of cointigrating vectors (r) must be less than the amount of variables in the
system for the cointigration result to be valid. In other words, r < n . Table 4.7 presnent
the JJ cointigration result.
For both model, using but trace and maxEigen statistics, suffecient evidences are found
to reject the first hypothesis (r = 0) at 5% significance level. But other hypothesis cannot
be rejected at 5% significance level. The rejection of this first null hypothesis indicates
that there exist cointigrating vectors btween the variables in model 1 and model 2.
4.3.5
scope of this study, the subsequent tests ignore the income equation and proceed to run
only the energy equation using both model 1 and model 2. The importance of this test,
in essence, is to justify the endogneity of energy consumption in the equation.
Model 1
Model 2
ECT le =0
4.840**
4.240**
(0.028)
(0.040)
7.793***
8.893***
(0.005)
(0.003)
0.948
0.991
(0.330)
(0.320)
0.068
ECT ly =0
ECTlp =0
ECT lpc =0
(0.794)
ECT ldc =0
0.324
(0.570)
According to Engle and Granger (1987), if X and Y each are nonstationary and cointegrated, then any standard Grangercausal inferences will be invalid and a more
comprehensive test of causality based on an errorcorrection model (ECM), should be
adopted.Therefore, since all variables are I(1) and evidences of cointigration are, the
48
Granger test is done in and VECM frame work. Table 4.9 and table 4.10 contain the
results of shortrun Grnager casuality tests. In mdel 1, short run causality results, reveal
that energy consumption Granger causes income in malaysia; this significant at 5%
level. Since Granger causality test is simply a test of precedence, ths result implies that
change in energy consumtpion preceed change in income the short run.
ECT
Variable
le
ly
lp
ldc
(tratio)
1.614
0.016
0.009
0.511**
[0.204]
[0.901]
[0.926]
(2.180)
4.898**
0.500
0.019
0.377**
[ 0.027]
[0.479]
[0.891]
(3.009)
le
ly
lp
ldc
0.331
0.966
0.055
1.326
[0.565]
[0.326]
[0.814]
(1.102)
0.009
2.234
0.005
0.253
[0.926]
[0.135]
[0.946]
(0.564)
Note: *** and ** denotes significant at 1% and 5% significance level, respectively. The figure
in the parenthesis () denote as tstatistic and the figure in the squared brackets [] represent
as pvalue.
49
le
ly
There appears to be no causal relationship between credit and energy consumption in the
short run.
ECT
Variable
le
ly
lp
lpc
(tratio)
1.308
0.095
0.478
0.567**
[0.253]
[0.758]
[0.489]
(2.383)
4.750**
0.582
0.613
0.374**
[0.029]
[0.446]
[0.434]
(2.861)
le
ly
lp
lpc
0.292
0.429
1.776
1.358
[0.589]
[0.513]
[0.183]
(1.116)
0.349
5.850**
0.401
0.086
[0.555]
[0.016]
[0.527]
(0.249)
Note: *** and ** denotes significant at 1% and 5% significance level, respectively. The figure in the
parenthesis () denote as tstatistic and the figure in the squared brackets [] represent as pvalue.
50
le
ly
lpc
The
equations. The ECT shows the speed and direction of adjustment to the longrun
equialibrium in the event of shock.
51
4.3.6
Longrun equation
As earlier stated, for estimating the longrun elasticity coefficients, DOLS is used due to
it effeciency at handling small sample size.
DOLS longrun
elasticities. This equations were estimated including SIC based Maximum lag and lead
method. Lag three is selected as the maximum leads and lags without altering results to
any significant degree. Trend specification is in constat level. Both models produced
very similar results. In general, result shows that a 1 unit in income is associated with
about 1.11 units increase energy consumption. Also, 1 percent increase in credit is
52
related to about 7.2% to 7.4 % percent increase in energy consumption per capita. The
price coefficient is not statisticall different from zero. This implies, as expected, that
energy price does not affect energy consumption in malaysia.
Model 2
Constant
1.890** (0.000)
1.553** (0.002)
ly
1.110** (0.000)
1.110** (0.000)
lp
0.026
0.027 (0.165)
ldc
0.072* (0.087)
(0.177)
lpc
0.074* (0.084)
Summary and Diagnostic Statistics
0.084
0.084
Adj. R2
0.99
0.99
DW Stat
1.718
1.718
JarqueBera Stat.
0.003 (0.999)
0.029 (0.986)
12.472 (0.711)
12.564 (0.704)
5.450 (0.000)
5.402 (0.001)
Note: *, **, and *** denote significant at 10%, 5%, and 1% significance level, respectively.
Figures in the parenthesis (...) are pvalues and the Figures in bracket [...] are standard errors.
53
Adjusted R2 shows the goodness of fit of each model.In both models, the independent
variables jointly explain about 99% of the changed in energy consumption. The DOLS
autocorrelation test is performed by obtaining the correlogram of the equations
residuals. The null hypothesis is: no autocorrelation up to lag 16. Appendix B1 and
appendix B2 present the correlograms of DOLS resilduals and the Qstatistics of up to
lag 16. According to Choi et. al. (2008), if residual of the regression are stationary, then
the regression is not spurious. A regression is technically called a spurious regression
when its stochastic error is unitroot nonstationary. Therefore the residual unit root test
is performed using ADF tstats with trend and intercept. Result shows that the
residuals are stationary in level.
4.3.7
income, price and credit in Malaysia was consucted. The schematic diagrams below (i.e.
Figure 4.3 and figure 4.4) sumarize the TY Granger noncausilty results . The full result
(in tabular form) are presented in Appendix A1 and Appendix A2
54
le
ly
lp
lpc
Note:
respectively.
and
le
ly
lp
ldc
Note:
respectively.
and
For both model, TY Granger result shows that income per capita Granger causes
energy in the longrun at 1% significance level. A reverse but relatively weaker longrun
Granger causality is observable from energy to income. Domestic credit to private sector
55
Grnager causes energy in the longrun at 5% level. However, bank credit to the private
sector does not Granger cause energy in the long run. Interestingly, credit seem to
Granger cause energy price at 1% significant level.
4.3.8
Prior tests are essentially restricted to the sample period used. Therefore, they are unable
to verify the degree of exogeneity of the variables beyond the sample period. Since cointegration test shows that r 0, Variance Decomposition (VDC) and Impulse Response
Functions (IRFs) approaches based on a vector autoregressive (VAR) are used to
explore relative importnace of income and credit to energy consumption in Malaysia.
4.3.9
Before proceeding with VDC and IRF it is important select the appropriate
decomposition method. This is done by observing the residual correlation matrix (in
VAR framework). Table 4.12 and Table 4.13 present the residual corelation matrix for
both models.
56
ly
lp
ldc
le
1.000000
ly
0.553955
1.000000
lp
0.252037
0.323853
1.000000
ldc
0.156752
0.131863
0.321240
1.000000
ly
lp
lpc
le
1.000000
ly
0.550240
1.000000
lp
0.236533
0.307924
1.000000
ldc
0.020649
0.363924
0.265146
1.000000
If at least one residual correlation matrix is higher than 0.5 2, we use Cholesky
decomposition method to order the variables from the most endogenous to the least
endogenous. Cholesky decomposition method restricts the off diagonal values of the
coefficient matrix to zero. If none of the coefficients is higher than 0.5. In this case
Cholesky decomposition method is employed because the correlation between energy
and income is high.
The 0.5 yardstick is a selected based on a simple rule of thump above average correlation coefficient is
assumed to be high correlation.
57
Sims (1980) notes that if a variable is truly exogenous with respect to the other variables
in the system, own innovations will explain all of the variables forecast error variance
Appendix C1 and Appendix C2 contain the Variance decomposition outcomes. Both
models show very similar VDC results. Over all, le,lp, lpc and ldc are the most
exogenous variable  a high proportion of their shocks are explained largely by their own
innovations compared to the contributions of the innovations from other variables. In
both models income (ly) was exogenous in the first three post sample period. However,
energy (le) the contribution of innovation in energy consumption to income becomes
larger than the innovation in income itself, for other 7 periods. the At the end of the 10
years period, the forecast error variances for le, ly, lp, lpc and ldc explained by their own
innovation are 86%, 33%, 47% and 74%, respectively, in model 1.
For model 2 the forecast error variances for le, ly, lp and lpc are 80%, 36%, 79% and
68%. Reagarding the level of importnace of income and credit in explaining future
movement of energy consumption in Malaysia, income is more important because it
explains about 19 to 26 percent of the energy forecast error variance, while credit
explain only 0.2 to 7 percent of energy forecast error variance, at the end of the post
sample period.
58
sudden increase in
movement in income per capita for about 3 periods. This increase levels up but does not
revert back to it preshock level. None of the shocks from credit variables trigers any
response in income per capita.
4.4
Concluding Remarks
Although the above empirics sure that both income and bank credit are important factors
of energy demand in Malaysia, income repeatedly comes forth as more important than
59
60
Chapter 5
5.0 Introduction
First, the objectives this research are also revisited. Furthermore, this chapter presents
viable policy recommendations based on the findings of the research and suggestions for
future research are made. Lastly, this chapter presents a short conslusion for the
research.
In the first chapter of this thesis, the general and specific objectives of this research are
clearly stated. These objectives form the scope of this research. Thus, after performing
the necceassary econometric anylisis, it important that we verify whether the objectives
of the research have been met.
61
5.1.1
First objective
The first objective was to investigate the relationship between bank credit and energy
consumption. This objective was achieved in a number of ways. This include using the
DOLS method for estimating the longrun elasticities, shortrun Granger causality in
VEC frame work and TY Ganger noncausality test for longrun causality inferences.
Overall, this research was able to establish that, for Malaysia, bank credit (especially
when measured by domestic credit to private sector) is an important factor for energy
consumption in the long run. Post sample period analysis (specifically, VDC) reveal that
bank credit is more important than energy price in determining future movements in
energy consumption. The relationship between credit and energy is positive in the longrun. Neither short run relationship nor causality is observable between credit and energy
consumption.
5.1.2
Second objective
and energy consumption. This was done in the same manner as the first objective.
Overall, income plays the most important role in determining energy consumption for
Malaysia. DOLS reports that the association between energy and income is positive and
significant. Granger casualty tests also reveal that in that energy causes income in the
short run but income causes energy in the longrun. These flows of causalities are found
62
to be highly significant. Post sample period analysis also shows that income is the most
important determinant of future movement in energy consumption. A sudden positive
shock in income will stimulate a positive and longlasting response in energy
consumption. Although this is out of the scope of this research, weak erogeneity test and
VDC result show that a large part of income is also determined by energy consumption.
5.1.3
Third objective
Lastly, the third objective of this research is to determine the relative importance of bank
credit and income in determining energy demand consumption for Malaysia. This can
easily be determined by observing the DOLS, VDC and impulse response functions. In
all three tests, income consistently showed up as the more important determinant of
energy consumption in Malaysia.
Malaysia is an emerging economy for which previous research suggests that its bank
activities are negligible when modelling her energy demand. However, this study finds
that this is not applicable in Malaysia. Therefore, modelling energy demand without
including credit as a factor could lead to underestimation and inaccurate energy demand
forecast for Malaysia.
63
Unlike what Kraft and Kraft (1978) find for the United States, we find that income
contributes to energy demand in Malaysia. Given that income and bank development
have high and positive relationships with energy consumption and that energy price does
not produce response in energy demand, the laymans thought will be that policymakers
are now to choose between opposing choices. Meaning that policymakers could either
implement policies that stimulate the economy by increasing income and creating credit
while facing the risk of sharp increasing energy consumption, or they could choose to
introduce more contractionary policies to reduce energy consumption.
However, there are other alternatives. Policymakers do not have to sacrifice economic
growth to control energy consumption. Instead, they could sensitize and encourage firms
and households to adopt energy saving practices such as using energy efficient machines
that provide same or better goods and services with less energy use and turning off lightbubs and appliances which are unused at any moment. Also, firms can be encouraged to
adopt power saving techniques. One way to encourage firms to be energy efficient is
through by improving the quality rating methodology. Quality rating organisations and
awards organisations should include energy efficiency in the list of criteria for rating
firms and their products. Studies have shown that awards and ratings do have effects on
firms performances [see, for example, Hegan (2000); Barrat and Hatton (2004) and
Azedegan and Dinesh (2008)]. In the attempt for better energy efficiency, public
sensitization is indispensable.
64
This study establishes that credit and income are very important determinants of energy
consumption in malaysia. Therefore, a good way to extend this study will be to
decompose credit and income into different economic sectors (for example,
manufacturing , service, finance and agricultural secotrs). Measuring credit allocated to
different sectors of the economy differently and estimiting which of the sectors credit
affect energy consumption the most will be very useful for policymaker.
65
Also, price is found to be insignificant in most of the results. The only instance were
price seem to have an interaction with any other variable (i.e credit) is in the longrun TY Granger noncausality. One possible reason for this unusual result is that the proxy
used does not fully capture the price effect. Future research could also focus on finding
a better proxy for domestic energy price.
5.4 Conclusion
Until recently, studies on energy demand have focused on the incomeenergy nexus.
Therefore, number of published works focusing on the probable effects of other
macroeconomic variables is very little. This study contributes to the energy literature by
presenting a bankenergynexus case for Malaysia.
Therefore, forecasting energy demand without including bank development and energy
consumption variables might produce inaccurate results for Malaysia. In trying to curb
66
energy misuse, improve energy efficiency and reduce greenhouse emission, Malaysian
policymakers may find it harder to achieve these goals if development in the banking
sector is not factored into their policy model.
67
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APPENDIX A1
Wald
Statistics
PValue
Decision
10.48637
0.0053
Reject
0.629803
0.7299
fail to Reject
6.365568
0.0415
Reject
8.420636
0.0148
Reject
4.554392
0.1026
fail to Reject
6.158856
0.0460
Reject
1.633244
0.4419
fail to Reject
4.556312
0.1025
fail to Reject
12.99452
0.0015
Reject
0.172555
0.9173
fail to Reject
2.070926
0.3551
fail to Reject
0.268228
0.8745
fail to Reject
Note: ***, **,* indicates 1%, 5% and 10% significance level, respectively.
does not granger cause.
represents
LE
H02: LP
LE
H03: LDC
LE
Effects Of Other Variables On Income
H05: LE
LY
H06: LP
LY
H07: LDC
LY
Effect Of Other Variables On Energy Price
H09: LE
LP
H10: LY
LP
H11: LDC
LP
LDC
H14: LY
LDC
H15: LP
LDC
73
APPENDIX A2
LE
H02: LP
LE
H03: LPC
LE
Effects Of Other Variables On Income
H05: LE
LY
H06: LP
LY
H07: LPC
LY
Effect Of Other Variables On Energy
Price
H09: LE
LP
H10: LY
LP
H11: LPC
LP
Wald Statistics
PValue
Decision
6.992938
0.0082
Reject
0.071456
0.7892
fail to Reject
1.151120
0.2833
fail to Reject
1.323625
0.2499
fail to Reject
3.144967
0.0762
Reject
3.817958
0.0507
Reject
0.078480
0.7794
fail to Reject
0.066984
0.7958
fail to Reject
6.891180
0.0087
0.007698
0.9301
fail to Reject
5.044944
0.0247
Reject
0.595190
0.4404
fail to Reject
Reject
LPC
H14: LY
LPC
H15: LP
LPC
Note: ***, **,* indicates 1%, 5% and 10% significance level, respectively.
not Granger cause.
represents does
74
APPENDIX B1
Model 1
Date: 05/20/12 Time: 16:40
Sample: 1971 2008
Included observations: 37
Autocorrelation
Partial Correlation
AC
PAC
QStat
Prob
0.104
. *.
. *.
0.104
0.4325
0.511
.* .
.* .
0.640
.* .
.* .
0.580
.* .
.* .
0.645
.* .
.* .
0.621
.* .
** .
0.552
. *.
. *.
0.128
0.091
5.7296
0.572
. *.
..
0.133
0.014
6.6039
0.580
.* .
.* .
0.623
.* .
.* .
0.581
.* .
0.656
12 0.127
9.5621
0.654
..
. *.
..


. *.
..
.* .



..



0.056
.* .
0.725
. *.
14 0.171
0.132
11.443
0.651
.* .
15 0.017
0.142 11.463
0.719
.* .
0.711
75
APPENDIX B2
Model 2
Partial Correlation
AC
PAC
QStat
Prob
0.107
. *.
. *.
0.107
0.4590
0.498
.* .
.* .
0.539
.* .
.* .
0.439
.* .
.* .
0.483
.* .
.* .
0.515
.* .
.* .
0.539
. *.
..
0.112
0.042
5.6456
0.582
. *.
..
0.152
0.025
6.7986
0.559
.* .
.* .
0.626
.* .
.* .
0.595
.* .
0.664
12 0.119
0.042
9.3498
0.673
..
. *.
..


. *.
..
.* .



..
.* .
13 0.019
0.070 9.3722
0.744
. *.
14 0.176
0.153
11.317
0.661
.* .
0.726
.* .
0.704
76
Appendix C1
Model 1
Variance Decomposition of LENERGY:
Period
S.E.
le
0.062782
ly
lp
ldc
100.0000 0.000000
0.000000
0.000000
0.078038
86.10940 13.80158
0.041931
0.047091
0.089822
77.79528 21.74567
0.072223
0.386829
0.101264
75.48184 23.16581
0.099157
1.253195
0.111949
73.79412 23.83162
0.099216
2.275042
0.121587
71.83567 24.78427
0.099015
3.281042
0.130517
70.02089 25.59676
0.107006
4.275339
0.138936
68.48189 26.15264
0.124398
5.241070
0.146892
67.15652 26.54997
0.151235
6.142270
10
0.154412
66.00074 26.85477
0.188256
6.956236
77
S.E.
le
ly
lp
ldc
0.035268
29.90837
70.09163
0.000000
0.000000
0.051663
35.35960
60.48270
1.961817
2.195877
0.065211
46.14394
47.42444
2.014097
4.417531
0.076624
51.68063
40.72328
1.884407
5.711687
0.086117
53.56495
38.14913
1.783342
6.502577
0.094538
54.43087
36.71716
1.734010
7.117958
0.102286
55.06878
35.57023
1.708019
7.652968
0.109477
55.52343
34.66588
1.693757
8.116936
0.116177
55.81670
33.97833
1.689706
8.515269
10
0.122460
56.01146
33.43601
1.694875
8.857652
78
Appendix C1
MODEL 2
le
ly
lp
lpc
0.061841
100.0000
0.000000
0.000000
0.000000
0.079878
87.22429
12.59619
0.179372
0.000146
0.091587
82.68886
17.08825
0.152273
0.070620
0.102568
82.47396
17.23755
0.136831
0.151665
0.112714
82.09237
17.59609
0.113790
0.197755
0.121747
81.44767
18.22601
0.097802
0.228527
0.130074
81.00643
18.65524
0.086438
0.251884
0.137934
80.71080
18.94252
0.077482
0.269195
0.145381
80.46355
19.18373
0.070212
0.282503
10
0.152460
80.25502
19.38729
0.064290
0.293401
79
le
ly
lp
lpc
0.033884
30.09883
69.90117
0.000000
0.000000
0.050262
34.15538
61.35829
2.299829
2.186502
0.063245
43.44376
48.17312
3.437528
4.945587
0.074047
47.70345
41.96338
3.510185
6.822984
0.082868
48.64788
39.78180
3.482437
8.087877
0.090511
48.94402
38.60371
3.489063
8.963211
0.097489
49.21361
37.72592
3.493119
9.567346
0.104004
49.42316
37.08410
3.491523
10.00123
0.110141
49.58144
36.59317
3.491590
10.33380
10
0.115959
49.71709
36.18961
3.493036
10.60027
80
Appendix C3
Model 1
Model 2
Response of LE to LY
Response of LE to LY
.08
.08
.06
.06
.04
.04
.02
.02
.00
.00
.02
.02
.04
.04
.06
.06
.08
1
.08
1
10
10
Response of LE to LP
Response of LE to LP
.08
.08
.06
.06
.04
.04
.02
.02
.00
.00
.02
.02
.04
.04
.06
.06
.08
.08
1
10
Response of LE to LDC
10
Response of LE to LPC
.08
.08
.06
.06
.04
.04
.02
.02
.00
.00
.02
.02
.04
.04
.06
.06
.08
.08
1
10
10
81
Response of LY to LE
Response of LY to LE
.08
.06
.06
.04
.04
.02
.02
.00
.00
.02
.04
.02
.06
.08
.04
1
10
10
Response of LY to LP
Response of LY to LP
.08
.06
.06
.04
.04
.02
.02
.00
.00
.02
.04
.02
.06
.08
.04
1
10
Response of LY to LDC
10
Response of LY to LPC
.08
.06
.06
.04
.04
.02
.02
.00
.00
.02
.04
.02
.06
.08
.04
1
10
10
82
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