Causality between trade openness and energy consumption: What causes what in high, middle and low income countries

Abstract

This paper explores the relationship between trade openness and energy consumption using data of 91 high, middle and low income countries. The study covers the period of 1980–2010. We have applied panel cointegration to examine long run relationship between the variables. The direction of causal relationship between trade openness is investigated by applying Homogenous non-causality, Homogenous causality and Heterogeneous causality tests.Our variables are integrated at I(1) confirmed by time series and panel unit root tests and cointegration is found between trade openness and energy consumption. The relationship between trade openness and energy consumption is inverted U-shaped in high income countries but U-shaped in middle and low income countries. The homogenous and non-homogenous causality analysis reveals the bidirectional causality between trade openness and energy consumption. This paper opens up new insights for policy makers to design a comprehensive economic, trade and policies for sustainable economic growth in long run following heterogeneous causality findings.