Energy use and output growth in Canada: a multivariate cointegration analysis

Using a neo-classical one-sector aggregate production technology where capital, labor and energy are treated as separate inputs, this paper develops a vector error-correction (VEC) model to test for the existence and direction of causality between output growth and energy use in Canada. Using the Johansen cointegration technique, the empirical findings indicate that the long-run movements of output, labor, capital and energy use in Canada are related by two cointegrating vectors. Then using a VEC specification, the short-run dynamics of the variables indicate that Granger-causality is running in both directions between output growth and energy use. Hence, an important policy implication of the analysis is that energy can be considered as a limiting factor to output growth in Canada. (C) 2003 Elsevier B.V. All rights reserved.