Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis
FCN Working Paper No. 8/2011
33 Pages Posted: 16 Jul 2011
Date Written: April 2011
In this paper we estimate residential electricity demand elasticities and conduct an analysis of the causal relationship between electricity demand, disposable income and electricity price for a group of several OECD members. We apply panel cointegration and Granger causality testing to a data set consisting of eighteen countries in the cross-sectional dimension and the years 1981–2008 in the time domain. Our results for the whole panel indicate a near unity income elasticity and an inelastic price elasticity of approximately –0.4 in the long run. These results are robust with regard to the estimation methods employed (group-means panel FMOLS and DOLS). In the short run, our estimates from an ECM indicate an income elasticity of 0.2 and a price elasticity of approximately –0.1. Moreover, our tests on Granger causality provide an indication for a bidirectional causal relationship between electricity consumption and economic growth. Hence, our findings are in favor of the feedback hypothesis.
Keywords: Residential electricity demand, Elasticities, Panel cointegration, Granger-causality, OECD countries
JEL Classification: Q41, Q43
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