Macroeconomic Impacts of Electricity Generation on Croatian Real GDP: Causality Analysis

Abstract

This paper examines the causal relationship between electricity generation and economic growth in Croatia using data for the period 1966–2010. The analyzed time span includes the periods of both the socialist and market based economy. Based on a detailed review of previous empirical studies it is possible to conclude that this issue has not been systematically explored and analyzed using Croatia as an example. In our analysis, we use a multivariate model (a conventional multifactor neoclassical aggregate production function) of real GDP and electricity generation together with capital stock, employment and technological progress. In order to get robust results this paper applies the autoregressive distributed lag (ARDL) cointegration procedure with a time break as an appropriate quantitative method when analyzing small samples. The empirical results provide clear support of a unidirectional causality that runs from electricity generation to real GDP in both short- and long-term. Electricity generation has a positive and statistically significant impact on Croatian real GDP. This means that stable, adequate and uninterrupted electricity supply is one of the crucial determinants of Croatia’s economic growth. Croatia should adopt a more vigorous economic policy that should aim to increase investments in the electricity infrastructure.