An Empirical Study on Income and Energy Consumption in Bangladesh

Abstract

This study investigates the inter-temporal causal relationship between energy consumption and economic growth in Bangladesh during the period 1971-2007. This issue is of fundamental importance for the developing economy of Bangladesh. We use the Autoregressive Distributive Lag (ARDL) bounds testing approach to cointegration tests to explore the dynamic relationship between energy consumption and economic growth in Bangladesh. We apply newly developed methods based on simulations that are robust to the violation of statistical assumptions especially when the sample size is small as is the case in this paper. The interesting results of the paper are that unidirectional causality runs from energy consumption to economic growth in Bangladesh and then restrictions on the use of energy could lead to a reduction in economic growth. There is a convergence process in the long-run dynamics of energy use to real GDP so that any shock in energy adjusts with real GDP by 2-2.5 year. The growth hypothesis suggests that energy consumption plays an important role in economic growth in Bangladesh.

Keywords: income, energy consumption, Granger causality, co-integration, error-correction model

JEL Classification: Q43; Q53; Q56