Controlling for relevant variables: Energy consumption and economic growth nexus revisited in an EGARCH-M (Exponential GARCH-in-Mean) model

This study empirically investigates the relationship between energy consumption and economic growth for five Asia-Pacific countries over the 1965-2010 period by controlling other relevant economic variables. We use annual data and employ a bi-variate exponential GARCH in mean model (Nelson, 1991) [47] in which we incorporate economic uncertainty, real oil price and real exchange rate in addition to energy consumption and real GDP (real gross domestic product). Our empirical evidence suggests that these additional variables had a significantly negative effect on energy consumption and/or economic growth. After controlling for the effect of these variables, we find that there is a two-way Granger causality for economic growth and energy consumption for Philippines, a one-way effect of economic growth on energy consumption for Singapore, and that the neutrality hypothesis holds for the rest of the countries. Our result suggests that (1) it is very important to control for relevant economic variables when investigating the nexus between economic growth and energy consumption, and (2) even with a high level of similarity among the countries studied, the nexus between energy consumption and economic growth can be different, supporting the notion that idiosyncratic characteristics can be important in making energy and economic growth policies for the developing countries.