Short- and long-run demand for energy in Mexico: a cointegration approach

The objective of this paper is to estimate the demands for the different types of energy consumption for the Mexican economy over the period 1965-2001. These demands are modeled as a function of output and the own real price. The Johansen (J. Econ. Dynamics Control 12 (1988) 231) procedure and the likelihood ratio tests indicate the existence of long-run and stable relationships between each type of energy demand and income with the exception of the industrial sector where the cointegrating vector also includes the relative prices. The weak exogeneity tests indicate that energy consumption and income do not reject the null hypothesis of weak exogeneity when relative prices are weak exogenous. The final econometric models show that relative prices in the short run are relevant in all cases, with the exception of the residential sector. These results indicate that in Mexico the demand for energy is fundamentally driven by income and that the effect of the relative prices is basically concentrated on the short run with the exception of the industrial sector, which also shows a long-term price impact. The strong dependence of energy consumption with respect to income and the price inelastic response indicates that it is necessary to introduce strong measures to decouple energy consumption from output in order to obtain sustainable economic growth in Mexico.