Energy Sources, Part B: Economics, Planning, and Policy

ISSN: 1556-7249 (Print) 1556-7257 (Online) Journal homepage: http://www.tandfonline.com/loi/uesb20

Electricity consumption and economic growth:

A causality analysis for Turkey in the frame of
import-based energy consumption and current
account deficit

Soner Gokten & Selim Karatepe

To cite this article: Soner Gokten & Selim Karatepe (2016) Electricity consumption and
economic growth: A causality analysis for Turkey in the frame of import-based energy
consumption and current account deficit, Energy Sources, Part B: Economics, Planning, and
Policy, 11:4, 385-389, DOI: 10.1080/15567249.2012.666332

To link to this article: http://dx.doi.org/10.1080/15567249.2012.666332

Published online: 10 Jun 2016.

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Download by: [University of Nebraska, Lincoln] Date: 11 June 2016, At: 09:02
 ENERGY SOURCES, PART B: ECONOMICS, PLANNING, AND POLICY
2016, VOL. 11, NO. 4, 385–389
http://dx.doi.org/10.1080/15567249.2012.666332

Electricity consumption and economic growth: A causality analysis

for Turkey in the frame of import-based energy consumption and
current account deficit
a b
Soner Gokten and Selim Karatepe
a
Department of Management, Faculty of Economics and Administrative Sciences, Baskent University, Ankara, Turkey;
b
Department of International Trade and Finance, Yalova University, Yalova, Turkey
Energy Sources, Part B: Economics, Planning, and Policy 2016.11:385-389.

ABSTRACT KEYWORDS
In this study, first the relationship between electricity consumption (EC) and Causality; current account
economic growth is analyzed using three different approaches to eliminate deficit; electricity
mis-specified statistical models and biased outcomes. Then, the relationship consumption; economic
between primary energy resources, which are import-based and used to growth; energy
produce electricity, and current account balance (CAB) is investigated. The
rationale behind analyzing the relationship between import-based energy
consumption and CAB lies on understanding the potential positive and
negative effects of energy consumption on economy. Statistical results
show that (1) unidirectional causality running from EC to economic growth
has been found for the case of Turkey and (2) there is a bidirectional
causality running from import-based EC to current account deficit.

1. Introduction
The relationship between energy consumption and economic growth has been studied several times
from different aspects. However, due to diversified empirical evidences and mis-specified statistical
approaches, explanations on the causal relationship between energy consumption and economic
growth have not been able to report in one direction. Defining this causal relationship is very
important for scholars as well as for policymakers, since the outcomes of studies are considered to
form policies that are needed for regulations.
In an energy-dependent economy, policies that reduce energy consumption may cause severe
economic problems due to the dependency of economic growth to energy consumption. In other
words, when the causality runs from energy consumption to economic growth, policymakers should
avoid regulations that affect energy consumption negatively. On the other hand, the causality runs
from economic growth to energy consumption show that there is no or small relationship between
energy consumption and economic growth due to conservation policies. In addition, when the causal
relationship is bidirectional, regulations should be implemented by considering the feedback effect of
economic growth on energy consumption.
In the literature, Kraft and Kraft’s (1978) seminal study is the first example that considers the
relationship between economic growth and energy consumption. While Kraft and Kraft (1978)
found Granger cause running from economic growth to energy consumption for the USA, in the
other studies such as Erol and Yu (1987) and Yu and Jin (1992), any relationship between economic
growth and energy consumption has not been found for the same country. Additionally, studies
concerning developing countries such as Ghosh (2002), Shiu and Lam (2004), Moritomo and Hope
(2004), Jumbe (2004), Wolde-Rufael (2004), Narayan and Smyth (2005), and Yoo (2005) have also

CONTACT Soner Gokten sgokten@baskent.edu.tr Department of Management, Faculty of Economics and Administrative
Sciences, Baskent University, Ankara, Turkey.
© 2016 Taylor & Francis Group, LLC
 386 S. GOKTEN AND S. KARATEPE

been carried out by focusing on the causal relationship between energy consumption and economic
growth. In the case of Turkey, several studies such as Soytas and Sari (2003) and Altinay and Karagol
(2005) have been conducted to examine the relationship between energy consumption and economic
growth. The outcomes of these studies are at the same direction, for which the causality for the
selected time periods runs from energy consumption to economic growth.
In the first part of this study, the relationship between economic growth and energy consumption
is examined by employing bivariate VAR models with different specifications. Then the relationship
between import-based energy consumption, which is mostly caused by electricity production, and
current account deficit is analyzed.
This paper is organized in the following manner; in section 2, electricity produced by import-
based energy resources (IB-EC) has been discussed for Turkey; in section 3, brief information about
the methodology regarding econometric models and description of data is given. In section 4,
empirical results of the econometric models are discussed and in the following section, conclusions
Energy Sources, Part B: Economics, Planning, and Policy 2016.11:385-389.

of the study are produced and possible implementations to policymakers and advices for future
studies are given.

2. Electricity production in Turkey

In view of the scarce domestic energy sources and production capacity, Turkey depends on import of
primary energy sources to produce electricity (Balat, 2005, 2009). According to Ministry of Energy
and Natural Resources’ report in 2009, 20364 thousand tons of coal, 33856 thousand tons of oil, and
35856 m3 of natural gas have been imported for several usage purposes. Additionally, 117046 GW/h
of electricity energy – indicating one-third of the total electricity production – has been produced by
these imported primary energy resources.

3. Econometric methodology and data description

Autoregressive or Vector Autoregressive (VAR) models are the tools of basic approaches in order to
test Granger causality between two series. According to Engle and Granger (1987), if the two series
are individually integrated of order one and co-integrated, then there would be a causal relationship
a least at in one direction. Several studies have followed the basic approaches using nonstationary
data due to spurious causality results caused by stationary series (Sims et al., 1990). If series are
nonstationary, they may also be co-integrated, which guarantees the existence of Granger causality in
at least one direction. If series are stationary, then nonstationary can be organized by taking first
difference of series. Several unit root tests can also be applied to examine whether the series are
stationary. However, these unit root tests have very low power against the alternative hypothesis of
stationary. Thus, results gathered from unit root tests could lead to biased estimations and
interpretations.
Dolado and Lütkepohl (1996) have followed different methods, in order to avoid problems
mentioned above, by estimating an intentionally augmented VAR series in levels and test general
restrictions on the parameter matrices even if the series are integrated or co-integrated. Following
the unrestricted VAR model demonstrates the DL approach:
      
LECt v1 a11;1 a12;1 LECt1
¼ þ (1)
LGDPt v2 a21;1 a22;1 LGDPt1
  
a a LECt2
þ 11;2 12;2
a21;2 a22;2 LGDPt2
    
a a LECt3 Ut
þ 11;3 12;3 þ
a21;3 a22;3 LGDPt3 Wt
 ENERGY SOURCES, PART B: ECONOMICS, PLANNING, AND POLICY 387

According to the DL Approach, the null hypothesis that GDP does not strictly Granger cause
electricity consumption (EC) is rejected if the coefficients a_12,1 and a_12,2 are jointly different
from 0, and the null hypothesis that EC does not strictly Granger cause GDP is rejected if the
coefficients a_21,1 and a_21,2 are jointly different from 0. Additionally, bidirectional causality exists
if Granger causality runs in both directions.
Turkish Statistical Institute web-based database is used to prepare data series of EC in GWh (EC),
GDP, and current account balance (CAB) for the period between 1950 and 2010.

4. Empirical results
Before applying statistical models to the selected series, it is very important to test the series with
diagnostic tools to check whether they are stationary. Table 1 demonstrates unit root tests that are
applied for both level and differenced series. To examine series whether they have unit root,
Energy Sources, Part B: Economics, Planning, and Policy 2016.11:385-389.

Augmented Dickey–Fuller (ADF), Phillips–Perron (PP) and Dickey-Fuller GLS (ADF-GLS) tests
were applied to both levels and differenced series. According to the results, differenced series of Log
EC and Log GDP are I(1) in nature. In other words, the first difference of GDP and EC series is
stationary.

4.1. Differenced series

Firstly differenced series are used to analyze the relationship between economic growth and EC by
employing the bivariate Vector Autoregression (VAR) model. After running the VAR model,
Granger causality test is applied to determine the direction of the relationship. Results of the VAR
model on differenced log GDP and log EC series are shown in Table 2. It can be observed from
estimations of the first model that there is a unidirectional causality running from EC to GDP.
However, to determine the direction of the relationship between EC and economic growth, Granger
causality test should be applied after the estimation of the VAR model.
In Table 2, results of Granger causality test on differenced series are listed. Considering the
estimations from Granger causality test, there is a unidirectional causality running from EC to GDP.

Table 1. Unit root tests.

Variable ADF PP DF-GLS
LEC -5.084a -4.566a -0.220
▲LEC -3.987a -3.930a -5.380a
LGDP -1.999 -2.171 -1.737
▲LGDP -7.168a -7.249a -6.653a
▲ first difference of the series, asignificant at 1%.

Table 2. Estimations from selected statistical approaches.

Null Hypothesis F-Statistics p-Value Decision
Differences Series
LGDP does not cause LEC 0.2095 0.901 Do not Reject
LEC does not cause LGDP 7.1956 0.027 Reject
Detrended Series
Null Hypothesis F-Statistics p-Value Decision
LGDP does not cause LEC 3.5709 0.168 Do not Reject
LEC does not cause LGDP 6.5828 0.037 Reject
DL Approach
Null Hypothesis F-Statistics p-Value Decision
LGDP does not cause LEC 0.3024 0.582 Do not Reject
LEC does not cause LGDP 5.9699 0.015 Reject
 388 S. GOKTEN AND S. KARATEPE

4.2. De-trended series

Second, as an alternative approach, de-trended series of log EC and GDP are taken into account. As
in the differenced VAR model, the same procedure is followed. As seen from Table 2 again, direction
of the relationship is the same for de-trended series. There is a unidirectional causality running from
EC to GDP. On the other hand, besides the causality running from EC to GDP, estimation for the
causality running from GDP to EC seems to be improved. Therefore it could lead to biased outcomes
if it is interpreted.

4.3. DL approach
And last but not least, this study employed the DL approach, which was proposed by Dolado and
Lütkepohl in 1996. The main reason to employ this approach is due to the low power of ADF and PP
test to detect unit root in series. Therefore to eliminate the possibility of reaching a biased
Energy Sources, Part B: Economics, Planning, and Policy 2016.11:385-389.

conclusion, the DL approach is also applied to levels of log EC and log GDP series. In the DL
approach, the augmented VAR model is also used; however, one more extra lag (p+1) is added to the
true lag order and a Wald test is performed on the coefficients of the first p lags only.
The null hypothesis for the following equation is GDP, which does not cause EC:
ð1Þ ð2Þ
H0 : a12 ¼ a12 ¼ 0 (2)
On the other hand, the null hypothesis for the following equation is EC, which does not
cause GDP.
ð1Þ ð2Þ
H0 : a21 ¼ a21 ¼ 0 (3)
According to the estimations in Table 2, it can be seen that GDP does not cause EC while EC
causes GDP. In conclusion, there is a unidirectional causality running from EC to GDP.

4.4. Relationship between import-based energy consumption (IB-EC) and CAB

Reified causality running from EC to GDP makes the investigation of the relationship between IB-
EC, which are used to produce electricity, and CAB more important, because EC can have an effect
not only on economic growth but also on CAB.
The results of the VAR model and Granger causality test show a bidirectional causal relationship
between import-based energy consumption and current account deficit (Table 3). In other words,
increase in import-based energy consumption causes higher current account deficit.

5. Conclusion
In this study, first the relationship between EC and GDP has been analyzed to determine the
direction of causal relationship. By determining the direction of this causal relationship, this study
could conduct an in-depth study and applied a statistical model to analyze the relationship between
import-based energy consumption and current account deficit.
The estimations in this study have demonstrated that there is a unidirectional causal relationship
running from EC to GDP. In other words, it has been found that an increase in EC causes economic
growth in Turkey. Additionally, this study found that there is a bidirectional casual relationship

Table 3. Granger causality for (IB-EC) and CAB.

Null Hypothesis F-Statistics p-Value Decision
LGDP does not cause LEC 7.7866 0.020 Reject
LEC does not cause LGDP 7.7427 0.021 Reject
 ENERGY SOURCES, PART B: ECONOMICS, PLANNING, AND POLICY 389

between import-based energy consumption and current account deficit. In other words, regulations
that increase import-based energy consumption might cause higher current account deficit and these
regulations should be implemented by considering this type of feedback effects.
Considering the outcomes from the first and second parts of analyses, this study encountered with a
contradiction. While higher EC causes economic growth, increase in import-based energy consump-
tion, which is used to produce electricity, affects the CAB and causes current account deficit. Taking
both these outcomes into account, it has been demonstrated that to obtain economic growth and not
to cause current account deficit by increasing the amount of EC, electricity should be produced using
national energy resources. In the case of Turkey, where natural resources are scarce, green energy
possibilities such as wind, wave, solar, etc. or other energy production facilities should be considered to
overcome the current account deficit problem and to obtain steady economic growth.

ORCID
Energy Sources, Part B: Economics, Planning, and Policy 2016.11:385-389.

Soner Gokten http://0000-0003-4213-1976

Selim Karatepe http://0000-0002-8536-203X

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