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Further results
This paper reexamines the causality between GNP and energy consumption by
using updated US data for the period 1947-1979. As a secondary contribution,
we investigate the causal relationship between energy consumption and employ-
ment. Applying Sims’ technique, we ftnd no causal relationship between GNP
and energy consumption. We find further that there is a slight unidirectional
flow running from employment to energy consumption. Economic interpretations
of the empirical results are also presented.
The important impact of energy consumption on the a feasible policy option without impairing economic
operation of an economy has been increasingly recog activity. However, the unidirectional causality from
nized by economists since the worldwide economic GNP to energy was questioned by Akarca and LongP
recessions following the Arab oil embargo in 1973. By shortening the data sample of Kraft and Kraft by
The relationships between energy consumption (EC) two years, Akarca and Long argue that ‘the results
and employment and gross national product (GNP) obtained by K and K appear to be spurious and to arise
have been the subject of intense research and heated solely from the inclusion of two additional years in the
debate. Earlier work in this area published in the 1970s data sample’s
includes the studies by Allen,’ Hitch,’ Khazzoom,3 and In another paper Akarca and Long’ examined the
Long and SchipperP among others. Recently, Kraft and relation between US domestic energy consumption and
Kraft’ and Akarca and Long6 have analysed the causal total employment for the period 1973-1978. Using
relationship between gross energy consumption and sophisticated Box--Jenkins type time-series procedures
GNP. Using Sims’ technique? Kraft and Kraft’ found and Granger’s criterion, they established a unidirectional
unidirectional causality running only from GNP to gross causality running from energy to employment. Further-
energy inputs (CEI) for the postwar period (1947- more, the relationship between the response of employ
1974). Their results imply that energy conservation is ment to a change in the energy input is negative. This is
an interesting result in its own right, because it implies
that total employment would slightly increase as a result
Eden Yu is with the Division of Economics, University of energy conservation.
of Oklahoma, Norman, OK 73019, USA, and the Depart- The purpose of this paper is to reexamine the causality
ment of Economics, Louisiana State University, Baton between GNP and energy consumption (EC) by using
Rouge, LA 70803, USA. Been-Kwei Hwang is with the
updated US data for the period 1947-1979.* As a
Division of Economics, University of Oklahoma.
secondary contribution, we investigate the causal rela-
Research support from the Energy Resource Center at the tionships between EC and employment (EMP). Applying
University of Oklahoma is gratefully acknowledged. J. Y. Choi
performed competent research assistance. The authors are
Sims’ technique we find no causal relationship between
indebted to Charlie Turner and an anonymous referee for very GNP and energy consumption. This result lends support
useful comments on an earlier draft. However. the usual caveat to the earlier finding of Akarca and Long.6 We also
applies.
find that there is a slight unidirectional flow running
Final manuscript received 14 November 1983. from employment to energy consumption.
The methodology and models that we employ in the To alleviate the problem of time-series autocorrelation,
causality tests are briefly presented in the next section. all the regressions are transformed into quasi first-
Further sections report results obtained from both difference form.? Since both Kraft and Kraft’ and
Granger and Sims tests for a variety of relationships, and Akarca and Long6 employed a lag structure of 3 past
present econometric remarks and economic interpreta- and 4 future in the right-hand side of the regressions,
tions of the empirical analysis. we adopt, for purpose of comparison, the same lag
scheme. A constant term, current, 3 past and 4 future
lags of the independent variables are specified on the
Methodology and model right-hand side of the unrestricted regressions for testing
Both Sims’ and Grange?’ have developed two econo- of causality.
metric tests of causality. According to Sims ‘the test An alternative way of testing the direction of causation
for unidirectional causality between X and Y is to is proposed by Granger.” According to Granger, X, is
regress Y on past and future values of X. Then if causing Y, if we are better able to predict Y, using all
causality runs from X to Y only, future values of X in available information than if the information apart from
the regression should have coefficients insignificantly the X, had been used. Suppose U, is the set of all avail-
different from zero as a group’.” able information including X,. Then X, is causing Y, if
To test via Sims’ technique the causality between and only if Var( Yr I U,) < Var( Yt I(U, - X,)). Granger
GNP and EC, the following four regression equations tests of causality between GNP and EC, for example,
are formulated: can be performed via the following set of regressions:
Degree of
Period Regmssion F freedom Type R2 DW
results, presented in the fourth row of Table 1, is com- March 1978. They found a unidirectional causality from
patible with the finding of Akarca and Long. Thus the energy to employment without feedback. Using a sample
caus& O&Y B.z~.&& by IdraFt 3& XX& disappa7ed OF X?.Z&W?&%+ hala Fur XQ??*?&I 19%1939, VW?$Wti
in the study sample extended for five more years or via Sims’s test that there is, however, a slightly uni-
shortened by two years, 1973-1974, during which directional flow from employment to energy. Para-
struciura( sfiicc may well kave occrmed. da&Xlly , @Xc &anger’s test W@Zals Ra WZk catrsal
Chow procedures were utilized by Akarca and Long relationship between energy and employment. The
to tt?$. <e&Z%!IG&@5nJf i&Z GYZ%G?iZXG&Z%?<G +%2- &X+-&Z& fm*&! @I!&G& &Z&c&X.-e ~WZ&%! &_ T&!&Z
197@ and 395D -IlPbB perio&. We ut%zea Bow tests 3. X Q$i%carit sIruc‘tur& Werence for Ihe two sui-
to determine possible slnsctual change &.uring the peri& t948--1973 and 1934-s979 was also detected
year 1973. The results, summarized in Table 2, indi- via the Chow test.+ The observed structural shift which
cate that there is a significant structural shift, which occurred during 1973 provides a partial explanation as
occurred around 1973.8 to why our empirical results conflict with those of
The second contribution of this note is to report Akarca and Long.
our results on the causality between energy consump-
tion and employment. Akarca and Long’ applied
Grare_rS crr?enbn co murfWy XY darrr~tic crrem
Some econometric and economic interpretations
and employment data for the period January 1973- Our empirical results clearly indicate a strong statistical
relationship between GNP and energy consumption.
That there was a significant correlation between the
Table 2. Chow tast - mgrass GNP on EC.
two variables is evident from the high R2 values reported
Period SSR R2 DW F (2.291 in Table 1. However, the causality tests reveal no uni-
directional causal linkage between GNP and energy.
1947-72 19203.6 0.983 0.352 Intuitively, energy should be correlated with GNP.
1973-79 8534.9 0.873 1.473 9.669=
However, causal relationships between energy and
1947-79 46234.8 0.983 0.332
GNP are not self-evident and warrant rigorous investi-
a Sigriiiilcant *Y%‘I~~+I. u@&n..
Several techniques are available to ascertain patterns
of causality among economic variables. Regression
gin view of this structural shift, we also fitted quarterly data
1973-01 to 1981-Ql to the regressions and found a slightly
analysis and spectral analysis have been used, for example,
unidirectional causality running from GNP to energy consump- to assess major determinants of common stock prices.1
tion. The results are presented at the bottom of Table 1. This
finding, consistenr w’lth the result ot Krait and KraSt, is in no *The F va\ue of Chow’s test is 175.13.
way definitive, because of the numerous contradicton/ empirical
resu Its ubraimd kum a &m-gmZ darabaze. *Far &%ails, se.? H.WnkW~er an& xoztinL3 a& CDWz+~!4
aSignificant at 5% level.
bCritical F(3.15) value at 5% level = 3.29;at 1% = 5.42.
Procedures to test causality were originally developed no such non-spurious causal linkage for the USA. The
by Strotz and Weld:’ they proposed that a diagonal results are extremely sensitive to samples, both in terms
covariance matrix could be recursive and causal. of sample length and the period of the data.
Basemann16 designed a statistical test of explicit causal
chains. Sims” provided operational interpretations of
Conclusions
Granger causal orderings associated with exogeneity.
The techniques proposed by Sims and Granger delineated Applying Sims’ test of causality to an updated data
above are efficient methods for testing causality, in sample, we found no causal relationship between GNP
an ordering sense, between any pair of time series. and energy consumption. This finding is supportive of
Since the main purpose of thii paper is to produce Akarca and Long’s argument that the causal order
additional empirical evidence so as to shed light on the suggested by Kraft and Kraft from GNP to energy is
mild debate between Kraft and Kraft’ and Akarca and a spurious one. We also observed a slightly unidirec-
Long6 regarding the causal relationships between energy tional causality running from employment to energy,
and GNP, thus energy was regressed on GNP only. In a which is inconsistent with the findings of Akarca
broader framework, one may, of course, posit that energy and Long.
is a function of GNP, some structural characteristics of We also tested causal relationships between energy
GNP, energy price and other relevant variables. In such and employment structure represented by a ratio of
a model, test for causality can be done for the dependent agricultural employment to non-agricultural employ-
variable, ie energy, and any one of its determinants. ment. The empirical results of Sims tests indicate a
Essentially, four regressions are required for each of the slightly unidirectional flow from employment ratio
determinants of energy. They are: (1) regress energy on to energy. Our test failed to establish any causal relation-
current and lagged values of the selected determinant; ship between per capita energy and per capita GNP.
(2) regress energy on current, lagged and future values
of determinants; regressions (3) and (4) are identical to
(1) and (2), except the determinant becomes the depen- References
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