Re-assessing causality between energy consumption and economic growth.

Abstract

The energy consumption-growth nexus has been widely studied in the empirical literature, though results have been inconclusive regarding the direction, or even the existence, of causality. These inconsistent results can be explained by two important limitations of the literature. First, the use of bivariate models, which fail to detect more complex causal relations, or the ad hoc approach to selecting variables in a multivariate framework; and, second, the use of linear causal models, which are unable to capture more complex nonlinear causal relationships. In this paper, we aim to overcome both limitations by analysing the energy consumption-growth nexus using a Flexible Fourier form due to Enders and Jones (2016). The analysis focuses on the US over the period 1949 to 2014. From our results we can conclude that, where the linear methodology supports the neutrality hypothesis (no causality between energy consumption and growth), the Flexible Fourier form points to the existence of causality from energy consumption to growth. This is contrary to the linear analysis, suggesting that lowering energy consumption would adversely affect US economic growth. Thus, by employing the Flexible Fourier form we find the conclusions can be quite different.