Exploring the Effect of Energy Consumption on the Economic Growth of Albania

Abstract

Albania is one of the most energy-resource abundant country, however faced with high domestic electricity demand. Moreover, the country is the largest crude oil producer in Europe. In this study, we investigate the following questions: (i) Is there a long-run association between energy consumption and output in Albania? (ii) What is the magnitude of energy effect in the short- and long-run on output in Albania? (iii) Which of the four hypotheses on the energy-growth nexus describes most appropriately the energy-growth nexus in the case of Albania? (iv) How do the results compare with those of earlier studies? Thus, the study examines the effect of energy consumption on the economic growth of Albania over the periods 1980 to 2014 using a Cobb-Douglas production function whilst controlling for multiple structural breaks. The short-run and long-run estimations are carried out using the autoregressive distributed lag (ARDL) bounds procedure. Causality is examined using the vector error correction method. Also, we conduct consistency and robustness checks using other regression methods. The results from the ARDL procedure indicate that the elasticity of income with respect to energy is 0.36. This implies that ceteris paribus, a 1% increase in energy consumption will increase output by 0.36%. The causality result supports the conservation hypothesis which implies that economic growth drives energy consumption, which is consistent with some of the earlier studies.