Energy consumption and economic growth in Korea: testing the causality relation

Abstract

The causal relationship between energy consumption and economic growth is investigated applying two multivariate time series models: a demand side model of energy, GDP and real energy price and a production side model of GDP, energy, capital, and labor. To test for Granger causality in the presence of cointegration among the variables, we employ a VECM rather than a VAR model. Empirical results from the two models for Korea over the period 1981:1–2000:4 suggest no causality between energy and GDP in the short run and a unidirectional causal relationship running from GDP to energy in the long run. It implies an energy conservation policy may be feasible without compromising economic growth in the long run. It also implies that a sustainable development strategy may be feasible with lower level of CO 2 emissions from fossil fuel combustion.