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A reassessment of energy and GDP relationship: the case of Australia

Abstract

This paper investigates the long- and short-run relationships between energy consumption and economic growth in Australia using the bound testing and the ARDL approach. The analytical framework utilized in this paper includes both production and demand side models and a unified model comprising both production and demand side variables. The energy–GDP relationships are investigated at aggregate as well as several disaggregated energy categories, such as coal, oil, gas and electricity. The possibilities of one or more structural break(s) in the data series are examined by applying the recent advances in techniques. We find that the results of the cointegration tests could be affected by the structural break(s) in the data. It is, therefore, crucial to incorporate the information on structural break(s) in the subsequent modelling and inferences. Moreover, neither the production side nor the demand side framework alone can provide sufficient information to draw an ultimate conclusion on the cointegration and causal direction between energy and output. When alternative frameworks and structural break(s) in time series are explored properly, strong evidence of a bidirectional relationship between energy and output can be observed. The finding is true at both the aggregate and the disaggregate levels of energy consumption.

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Notes

  1. Empirical studies present four testable hypotheses based on the direction of causality [see Payne (2010a) for details].

  2. The results are not reported here to conserve space, but can be available from the authors upon request.

  3. The structural break (s) dummies are included in a model based on the Z–A and L–S tests.

  4. Detailed results can be obtained from the authors upon request.

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Acknowledgments

We thank David I. Stern for very useful comments.

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Correspondence to Md. Shahiduzzaman.

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Shahiduzzaman, M., Alam, K. A reassessment of energy and GDP relationship: the case of Australia. Environ Dev Sustain 16, 323–344 (2014). https://doi.org/10.1007/s10668-013-9479-4

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Keywords

  • Energy consumption
  • GDP
  • Cointegration
  • Causality