Income and Energy Consumption in Asia A Panel Cointegration Analysis with Common Factors

Abstract

The research presented in this paper studies the relationship between energy consumption and income for a panel of Asian economies. The Asian economies represent a dynamic, diverse, and interesting set of countries on which to base an examination of these relationships and the tendencies for these economies to be on a path of convergence and integration in their energy consumption and use characteristics. We start with an overview of the evolution of energy intensities for the individual countries in our study. Panel data methodologies are then employed to gain the advantage of increased explanatory power of the econometric analysis results from pooling time series and cross-section observations. In addition, our panel cointegration analyses incorporate common factors as a means of accounting for variables beyond the bivariate relationship between income and total final energy consumption. The results find support for the flow of causality running from income to energy consumption, albeit with feedback. The results are consistent with and supportive of the findings of the seminal paper by Kraft and Kraft (1978). In addition, the long-run income elasticity estimates for the panel find that the estimates are very sensitive to the inclusion or exclusion of common factors.