Effects of Energy Efficiency Index on Economic Activity: The Case of G7 Countries

Abstract

This investigation aims to examine the effects of energy efficiency improvements on economic growth for G7 countries during 1971-2018. To measure energy efficiency, we calculate the energy efficiency index (EEI) using the Fisher Ideal index decomposition method. This study utilizes capital and labor as control variables, in addition to the EEI variable, as determinants of economic growth. Methodologically, this paper conducts the LM (Lagrange Multiplier) bootstrap panel cointegration test which is developed by Westerlund ve Edgerton (2007), and the AMG (Augmented Mean Group) estimator of Eberhardt ve Teal (2010). Both methodologies take into consideration of cross-sectional dependency (CD) issue in the panel setting. The empirical results of this paper indicate that there is a cointegration relationship between the aforementioned variables. In detail, the impact of capital formation on economic growth is positive for all countries, while the effect of labor varies across countries. Besides, it is found that an improvement in energy efficiency leads to an advancement in economic growth for five out of seven G7 countries. The empirical findings of this paper provide some implications for policymakers.