Abstract
This paper attempts to shed light into the Granger causality relationship between energy consumption and economic growth allowing structural breaks for China, based on two multivariate time series models: a demand side model of energy consumption, real GDP and energy price and a production side model of GDP, energy, capital, and labor. To test for Granger causality in the presence of cointegration between the variables, we employ a VECM rather than a VAR model estimation. Empirical results from the two models for China over the period 1952-2007 show that there is a bi-directional causalities between energy consumption and GDP, both in the short-run and long-run. This indicates unanimously that energy acts as an engine of economic growth, and that energy conservation policies may harm economic growth in China. It also implies that energy consumption keeps on growing as long as the economy grows in China.
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