Energy consumption-GDP nexus: Heterogeneous panel causality analysis

Existing studies examining the Granger causality relationship between energy consumption and GDP use a panel of countries but implicitly assume that the panels are homogeneous. This paper extends the Granger causality relationship between energy consumption and GDP by taking into account panel heterogeneity. For this purpose, we use a large panel of 79 countries for the period 1980-2007. Specifically, we examine four different causal relationships: homogeneous non-causality, homogeneous causality, heterogeneous non-causality, and heterogeneous causality. The results show that roughly seven-tenths of the countries exhibit bi-directional Granger causality, two-tenths exhibit no Granger causality, and one-tenths exhibit uni-directional Granger causality.

► We examine the Granger causality between GDP and energy for a panel of 79 countries. ► We introduce panel heterogeneity into the causality analysis. ► We find strong evidence for heterogeneity in panel causality between GDP and energy. ► Bidirectional causality holds for 7/10 of the countries and 2/10 exhibit no causality. ► The results point to the importance of testing for heterogeneity in causality between GDP and energy.