OVERVIEW OF ELECTRICITY CONSUMPTION-ECONOMIC GROWTH CAUSALITY LITERATURE: WHERE HAS THE EMPIRICAL RESEARCH LED US SO FAR?

Pavle Jakovac
Ph.D., University of Rijeka, Faculty of Economics, Ivana Filipovica 4, 51000 Rijeka, CROATIA, pjakovac@efri.hr

Abstract
Given the undisputed theoretical and practical importance of energy, including electricity, it can be stated that this factor represents an important foundation for economic growth and development. Not only because it improves the productivity of labour, capital, technology and other production factors, but also due to the fact that increased consumption of energy, primarily electricity (as its most flexible, commercial and purest form and a key infrastructural input in the socio-economic development), affects economic growth. The lack of consensus on whether economic growth results in electricity consumption and generation or is electricity the stimulant of economic growth has aroused the curiosity and interest among economists and analysts to investigate the direction of causality between these variables. Although economic growth models explicitly do not contain energy variable(s), during the last 20 years a number of empirical research papers have addressed the causality between electricity variables (consumption and/or generation) and economic growth. Over time, various empirical studies have focused on different countries or groups of countries (both developed and developing countries as well as the so-called emerging economies), time periods, main (and proxy) variables and quantitative methods. The results of such studies are often contradictory. This can be explained by different econometric methodologies, different data set and different countries’ characteristics. Furthermore, in most of the studies the causality analysis between electricity variables and the gross domestic product was carried out in the so-called bivariate framework. With the exception of a few studies, most of them do not establish whether the effect of independent variable on the dependent variable is positive or negative, nor do they examine the intensity of the causal relation. Although new and more sophisticated econometric methods for (better) identification and understanding of causality were developed over the years, an increasing number of published empirical studies regarding interconnectedness of electricity and GDP still has inconsistent results. A lack of compliance on what kind of causal relationship actually exists can result in inadequate implementation of appropriate economic and energy policy. Therefore, the aim of this paper is to give an overview of the existing literature with subsequent conclusions and guidelines for future research.

Keywords: electricity consumption, economic growth, causality literature, empirical results.