On the methodology of energy-GDP Granger causality tests

Despite their growing technical sophistication and empirical breadth, Granger energy-GDP causality tests remain inconclusive, leaving unresolved the increasingly relevant debate over the role of energy or energy growth in economic growth. While historians and growth theorists point to the development of the steam engine, the electromagnetic motor and the ensuing energy deepening as a key contributing factor in economic growth, the existing tests provide little support for this view. This paper examines this debate, focusing particular attention on the underlying methodology, specifically on the measures of energy used. It is argued that existing tests, by regressing GDP growth on current and lagged levels of energy consumption growth, do not capture the essence of the historical record and recent work on energy and development [23] and [35]. A new energy metric in the form of energy availability is presented and discussed in detail.