GDP, energy consumption and financial development in Italy

Abstract

PurposeThis study aims to explore the relationship among energy consumption, real income, financial development and oil prices in Italy over the period 1960-2014.Design/methodology/approachDifferent econometric techniques – such as the General Methods of Moment (GMM) or the AutoRegressive Distributed Lags (ARDL) bounds test – are usually used in the empirical analysis. Moreover, both the Toda and Yamamoto causality tests and the Granger causality tests are applied to the data.FindingsThe results of unit root and stationarity tests show that the variables are non-stationary at levels, but stationary in first-differences form, or I(1). The ARDL bounds F-test reveals an evidence of a long-run relationship among the four variables at 1% significance level. Moreover, an increase in real GDP and oil prices has a significant effect on energy consumption in the long run. The coefficients of estimated error correction term are also negative and statistically significant. In addition, the paper explores the causal relationship between the variables by using a VAR framework, with Toda and Yamamoto but also Granger causality tests, within both multivariate and bivariate systems. The findings indicate that energy consumption is affected by real GDP.Originality/valueThe study also filled the literature gap of applying ARDL technique to examine this relevant issue for Italy.