Energy Consumption Effects on an Economy with Structural Breaks: Evidence from Portugal (1965-2008)
Fuinhas, José Alberto, Marques, António Cardoso, IUP Journal of Applied Economics
The paper examines the nexus between growth and primary energy consumption in Portugal, using the Autoregressive Distributed Lag (ARDL) bounds test approach with annual time series data from 1965 to 2008. Portugal is a medium-sized economy which has experienced several episodes of economic expansion and stagnation that make it of particular interest. Portugal is constrained by external energy dependency and is faced with the policies of energy preservation due to international commitments and initiatives, such as the Kyoto Protocol and Directives of European Union, that potentially may have deep implications for its economic growth. Empirical results suggest that energy causes growth in the long run and short run, but growth only causes energy consumption in the short run. Therefore, an energy policy to promote consumption constraints on energy will reduce GDP growth in Portugal.
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The study of causal relationship between primary energy consumption and economic growth, at the aggregate level, is specially important when countries have strong dependency on imported energy supplies that could expose countries to the adverse external shocks to economic growth.
Currently, there is a large literature studying the nexus between growth and energy consumption. Some of those studies focus on the analysis of a particular country (e.g., Lee and Chang, 2007; and Wolde-Rufael, 2009), while others analyze groups of countries (e.g., Akinlo, 2008; and Chiou-Wei et al., 2008). Recently, Ozturk (2010) summarized the literature linking energy consumption to economic growth as well as the causality between electricity consumption and economic growth. Ozturk points out that the empirical outcomes of the several studies on the direction of causality and long-term versus short-term impact are frequently diverse, depending on the data, alternative econometric methodologies and countries' characteristics. Following this statement and given the particular characteristics of Portugal, our aim is to study the causal relationship between primary energy consumption and economic growth and to ascertain the degree of primary energy consumption dependence for Portugal.
The Portuguese reality is poorly studied. As far as we know, till date there has been no study analyzing solely the relationship between primary energy consumption and economic growth in this country throughout a time horizon of 44 years. The only work that focused exclusively on Portugal is a recent paper by Pereira and Pereira (2010). The authors use a vector autoregressive model to estimate the impact of emissions of carbon dioxide from the various fossil fuels used in economic activity, but does not catch the recent period of economic stagnation in Portugal which occurred during the 2000s. Besides this, there are other papers relating energy consumption and economic growth that refer to Portugal, but just as a part of a broader set of countries, such as Narayan and Prasad (2008) and Chontanawat et al. (2008).
Portugal is a medium-sized economy, which since the mid-1960s has gone through several experiences, making it of particular interest in the study of very old countries with episodes of strong economic expansion and lengthy stagnation. This is a country with huge external energy dependency and is faced with policies of energy preservation and promoting renewable energy sources. This is due to international commitments and initiatives, such as the Kyoto Protocol and Directives of the European Union (e.g., EU Directive 2001/77/EC), which may have severe implications for economic growth. The Portuguese data show outliers and structural changes due to economic shocks and stagnation. In order to overcome these limitations, we use the well-tested econometric approaches that give us robust results, such as the Autoregressive Distributed Lag (ARDL) bounds tests.
We add to the literature on the energy-growth nexus, the empirical evidence of a new country, with many special characteristics such as being a country going through a decade of crisis with lack of growth. …