Exploring the relationship between energy consumption and GDP: Evidence from Croatia

Abstract

The main purpose of this paper is to explore the relationship between total energy consumption and real gross domestic product (GDP) covering the period between 1992 and 2010 in Croatia. The methodology employed in this paper is based on the bivariate vector autoregression (VAR) and Granger causality tests. Moreover, the impulse response function and variance decomposition analysis are employed to trace the dynamic response paths of shocks to the system. The empirical analysis shows that, when it is allowed for any deterministic component in the data, total energy consumption and real GDP are not co-integrated in the period observed. Furthermore, there is a unidirectional causality running from total energy consumption to GDP, and an impulse response to GDP caused by energy consumption, being mainly embodied in the first years. The results indicate that total energy consumption is an important component determining economic growth in Croatia and that energy conservation policy should be formulated and implemented wisely. This paper also tests the causality between real GDP and consumption of the five energy variables by using the bivariate VAR. The main implication of these tests is that individual energy forms matter when it comes to energy policy formulation.