Energy Consumption and Economic Growth Nexus in Ghana.

Abstract

The main purpose of this study is to examine the nexus between energy consumption disaggregated into Petroleum and Electricity Consumption and Economic Growth in Ghana in a cointegrated VAR framework. The Johansen test of cointegration indicates that there is no long run relationship between electricity consumption and economic growth. On the other hand, the Johansen test of cointegration indicates that there is a positive long run relationship between petroleum consumption and economic growth. Since there was no existence of long run relationship between electricity consumption and economic growth, the variables were first differenced, and the causality test conducted in a VAR framework. The results of the Granger causality based on the VAR revealed that there is a unidirectional causality from economic growth to electricity consumption in Ghana. The granger causality based on the Vector Error Correction Model (VECM) revealed that there is a unidirectional causality running from petroleum consumption to economic growth in both the short and long run. The impulse response function shows that economic growth responds positively to shocks in petroleum consumption whiles electricity consumption responds positively to a shock in economic growth. It is recommended that appropriate electricity conservation measures should be developed and intensified since this will not retard growth in the economy. Also, petroleum consumption seems to be an important principal factor in short run as well as in the long run for the Ghanaian economy, policies should therefore be targeted at making constant and available petroleum products so that the Ghanaian economy can grow positively.