Modelling Energy Demand in Bangladesh: An Empirical Analysis

Abstract

Energy plays a dynamic role in an economy. To understand the different events taking place in the energy market as well as the importance of the energy sector in the national economy, energy demand has to be understood thoroughly. As Bangladesh is one of the emerging nations of the world, it is necessary to gain knowledge about energy demand pattern. To the best of our knowledge, no studies have been conducted for modelling energy demand in Bangladesh. The aim of this research paper is to create an energy demand model for Bangladesh on the basis of annual data covering from 1980-2015. In this research paper, we have employed Augmented Dickey Fuller (ADF) unit root test to check stationarity of the variables. All the variables were found to be stationary either at first differences. For long run analysis, we employed Johansen’s Cointegration test, which confirmed the existence of cointegrating relationship among the variables. We also employed Granger Causality test to investigate the causal relationship. Results show that in the long run there is no causal relationship between energy price and energy demand. Moreover, four more unidirectional relationships (real income to energy demand, household expenditure to energy demand, population to energy demand and energy demand to carbon emission) are observed. For short run analysis, we used Vector Error Correction Model (VECM). We found that in the short run there is a unidirectional causality running from energy price to energy demand and a bidirectional relationship between energy demand and population. Dynamic Ordinary Least Square (DOLS) method is used for estimating the long run price and income elasticities and the estimation reveals that the long run price and income elasticities are -0.75 and 0.45 respectively. As Bangladesh wishes to become middle income country by 20201, these findings can be useful for the policy makers to come up with appropriate policies, which can ensure energy security in Bangladesh.