Causal relationship between energy consumption and GDP revisited: the case of Korea 1970-1999

Causal relationship between energy consumption and economic growth is investigated applying a multivariate model of capital, labor, energy and GDP. Usual BTU energy aggregate is substituted with a Divisia aggregate in an attempt to mitigate aggregation bias. To test for Granger causality in the presence of cointegration among the variables, we employ a vector error correction model rather than a vector autoregressive model. Empirical results for Korea over the period 1970-1999 suggest a long run bidirectional causal relationship between energy and GDP, and short run unidirectional causality running from energy to GDP. The source of causation in the long run is found to be the error correction terms in both directions. (C) 2003 Elsevier Science B.V. All rights reserved.