Energy Consumption and Economic Growth in China's Industrial Sectors

Abstract

This paper applies panel methodology to examine the short-run dynamics, the long-run equilibrium relationships and the causal relationship between energy consumption and economic growth. It is based on China's 37 industrial sectors over the period 1998 to 2010. Tests for panel unit roots, co integration in heterogeneous panels and panel causality are employed in a bivariate panel vector error correction model (PVECM), which is estimated by the system generalized moment method (SYS-GMM). The results show evidence of a long-run equilibrium relationship between economic growth and energy consumption, 1% increase in the energy consumption will lead to an increase of 0.87% in real value added of industrial sectors. It is found that a strong bidirectional causal relationship is found between these two series. In short run, there is a unidirectional causality running from economic growth to energy consumption, but in long run, this relationship is reversed, there is a unidirectional causality running from energy consumption to economic growth.