Coal Consumption and Economic Growth Revisited: Structural Breaks, Cointegration and Causality Tests for Pakistan

Abstract

A global profusion of coal provides many countries with opportunities for economic growth. The direction of causality between coal consumption and economic growth is useful for policy making, however, existing empirical evidence have failed to reach a consensus. This paper examined the liaison between coal consumption and economic growth for Pakistan over the period 1971–2009. The endogenous two-break LM unit root test, derived in Lee and Strazicich (2003), is used to assess the order of integration of the variables and structural breaks in the data series. Application of the autoregressive distributed lag ( ARDL) bounds test reveals a cointegrating relationship between real income, real capital stock, labour and coal consumption, and further application of general to specific ( GETS), Engle and Granger ( EG), Stock Watson's dynamic ordinary least squares ( DOLS) and Phillip Hansen's fully modified ordinary least squares ( FMOLS) methods show statistical robustness of the estimates. The elasticity with respect to coal consumption is positive and significant. The vector error correction model ( VECM) based Granger causality test and innovative accounting procedures (variance decomposition and impulse response functions) are also applied.