Causality analysis between electricity consumption and real GDP, GDP based on Purchasing Power Parity, government spending, and total national savings in Iran

Abstract

This paper investigates the Granger causality between Electricity consumption per capita (ECC) and real GDP per capita, GDP based on Purchasing Power Parity (PPP) per capita, government spending, and total national savings. The data period is from 1980 to 2010. The results of the Stationary test show that all variables are integrated to an order of one. ECC and real GDP per capita, GDP based on PPP per capita, and government spending are not cointegrated and there is no long run relationship between them and for examining the causality nexus the Vector Auto Regression model (VAR) is applied. On the other hand, ECC and total national savings are cointegrated so the Vector Error Correction Model (VECM) is used for causality analysis. The results of the Granger causality test indicate that GDP based on PPP per capita granger causes the ECC. Since GDP based on PPP is a comparative measure of standard of living, it can be concluded that when the relative standard of living in Iran improves, ECC increases as well. However, PPP figures are estimates rather than hard facts, and should be used with caution.