Energy Consumption And Economic Growth In China: New Evidence From The Co-Integrated Panel VAR Model

Abstract

This study is conducted to explore the relationship between energy consumption and economic growth in China over the period 1995-2010 using the panel time-series techniques under a multivariate framework. The results reveal that there are long-run co-integration relationship among variables real GDP, energy consumption, capital formation and labor force. Furthermore, based on the panel VEC model, there is bidirectional causality between economic growth and energy consumption, which is consistent with the growth hypothesis in terms of the energy consumption-growth nexus. The unidirectional causality from capital formation to energy consumption reveals that energy consumption cannot affect economic growth through capital formation. Additionally, real GDP, energy consumption, capital formation and labor force each respond to short-run deviations from long-run equilibrium with a slow adjustment speed. Finally, by estimating the panel VAR model, it is found that the responses of real GDP to a shock of energy consumption are negative, whereas the shock of real GDP changes is positive with most of the energy consumption response being absorbed during the six years. By variance decompositions derived from the orthogonalized impulse-response coefficient matrices, a shock in the energy consumption takes the biggest effect on real GDP in both short-run and long-run.