Examining the stability of the long-run relationship between energy and GDP in the presence of an industrialization process

ABSTRACT

In this paper, we examine the extent to which the relationship between energy consumption and real gross domestic product can be affected by an effective economic development policy based on industrialization. The Spanish Stabilization and Liberalization Plan of 1959 is regarded as a “natural experiment” that is especially interesting for our purposes. To explore long-run causality and possible changes in its direction, we have exploited statistical information for a long period (1900–2008). We applied a moving-window regression procedure based on the augmented vector autoregressive methodology of Toda and Yamamoto (1995). Causality results are highly sensitive to the industrialization process. For the sub-period preceding the development policy, we consistently found greater support for the “conservation hypothesis”. This contrasts sharply with the set of results obtained from the data belonging to the subsequent sub-period, where evidence is in favor of the “growth hypothesis”.

KEYWORDS:

• Causality
• energy consumption
• GDP
• industrialization
• Spain

Funding

Financial support from the European Union FEDER funds and the Spanish Ministry of Economy and Competitiveness (ECO2014-58975-P) are gratefully acknowledged.

Notes

¹ See, for example, Ozturk (2010), Payne (2010a), and Payne (2010b).

² This apparent lack of consensus is also applicable to the Spanish case. To our knowledge, there are four papers on issue using data information from the sixties. Thus, while the recent paper by Narayan and Popp (2012) finds that energy consumption causes real GDP, the results of Climent and Pardo (2007) and Fuinhas and Marques (2012) also support the existence of inverse causality. In contrast, in the paper by Chontanawat et al. (2008) causality is not found between the two variables when Spain is analyzed.

³ A more detailed discussion about political changes can be seen in Fernández-Navarrete (2005).

⁴ As in other papers on this issue (e.g., Fuinhas and Marques 2012), we acknowledge that some bias from omitted variables could result from the use of simple bivariate models. We are obviously limited to the availability of time series for the analyzed period. However, rather than improving the accuracy of the causality test for a given sub-period, we are more interested in the sensitivity of the results when faced with changes in the degree of industrialization.

⁵ Moreover, the stability conditions for VAR from Eq. (1) are satisfied for both sub-periods. The inverse roots of the AR characteristic polynomial are available upon request from the corresponding author.

Additional information

Funding

Financial support from the European Union FEDER funds and the Spanish Ministry of Economy and Competitiveness (ECO2014-58975-P) are gratefully acknowledged.