Energy consumption and economic growth: New insights into the cointegration relationship

This paper examines the long-run relationship between energy consumption and real GDP, including energy prices, for 25 OECD countries from 1981 to 2007. The study employs principal component analysis to differentiate between common factors and idiosyncratic components, thereby identifying international and national developments as distinct drivers of the long-run relationship. Findings reveal that cointegration among the common components of the underlying variables suggests an international dominance in shaping the relationship between energy consumption and real GDP. Additionally, the results indicate that energy consumption exhibits price-inelasticity. Causality tests reveal a bi-directional causal relationship between energy consumption and economic growth, implying that both factors significantly influence each other. This insight holds relevance for policymakers, particularly in the context of energy conservation policies and their potential implications for economic growth.