Abstract
Taking into accounts for the dual role of energy in the demand and supply, this paper develops a vector error-correction model (VECM) to test for the existence and direction of causality between energy consumption and economic development in Malaysia. Using the Johansen cointegration technique, the results indicate that the long-run movements of economic development, energy price, the structure of economy, capital, labour and energy use in Malaysia are related by two cointegrating vectors. Further, the results show that there is directional causality running from economic development to energy consumption. Hence, an important policy implication of this study is that energy saving would not harm economic development in Malaysia.
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