development of new energy

Granger Causality and the Energy GDP Relation

A series of analyses use statistical tests to evaluate whether energy use or energy prices determine economic growth, or whether the level of output in the United States and other economics determine energy use or energy prices. Generally, the results are inconclusive. Where significant results are obtained, they indicate causality from output to energy use.

One analysis tests U. S. data (1947-1990) for Granger causality in a multivariate setting using a vector autoregression model of GDP, energy use, capital, and labor inputs. The study measures energy use by its thermal equivalents and the Divisia aggregation method discussed previously. The rela­tion among GDP, the thermal equivalent of energy use, and the Divisia energy use indicates that there is less ‘‘decoupling’’ between GDP and energy use when the aggregate measure for energy use accounts for qualitative differences (Fig. 3). The multivariate methodology is important because changes in energy use are frequently countered by substitution with labor and/or capital and thereby mitigate the effect of changes in energy use on output. Weighting energy use for changes in the composition of the energy input is important because a large portion of the growth effects of energy is due to substitution of higher quality energy sources such as electricity for lower quality energy sources such as coal (Fig. 1).

Bivariate tests of Granger causality show no causal order in the relation between energy and GDP in either direction, regardless of the measure used to qualify energy use (Table III). In the multivariate model with energy measured in primary Btus, GDP was found to ‘‘Granger cause’’ energy use. However, when both innovations—a multivariate model and energy use adjusted for quality—are employed, energy Granger causes GDP. These results show that adjusting energy for quality is important, as is considering the context within which energy use is occurring. The conclusion that energy use plays an important role in determining the level of economic

Granger Causality and the Energy GDP Relation

FIGURE 3 Energy use and GDP in the United States, with energy use measured in heat equivalents and a Divisia index. From Stern (1993).

TABLE III

Energy GDP Causality Tests for the United States, 1947-1990

Bivariate model

Multivariate model

Quality-adjusted

Primary Btus energy

Quality-adjusted

Primary Btus energy

Energy causes GDP

0.8328

0.9657

0.5850

3.1902

0.4428

0.4402

0.5628

0.3188E—01

GDP causes Energy

0.3421

0.7154

9.0908

0.8458

0.7125

0.5878

0.7163E—03

0.5106

a The test statistic is an F statistic. Significance levels in italics. A significant statistic indicates that there is Granger causality in the direction indicated.

activity is consistent with results of price-based studies of other energy economists.

development of new energy

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