Energy Sources, Part B: Economics, Planning, and Policy

ISSN: 1556-7249 (Print) 1556-7257 (Online) Journal homepage: http://www.tandfonline.com/loi/uesb20

Electricity consumption and growth in Eastern

Europe: An ARDL analysis

Melike E. Bildirici & Fazıl Kayikçi

To cite this article: Melike E. Bildirici & Fazıl Kayikçi (2016) Electricity consumption and growth
in Eastern Europe: An ARDL analysis, Energy Sources, Part B: Economics, Planning, and Policy,
11:3, 258-266, DOI: 10.1080/15567249.2011.634885

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 ENERGY SOURCES, PART B: ECONOMICS, PLANNING, AND POLICY
2016, VOL. 11, NO. 3, 258–266
http://dx.doi.org/10.1080/15567249.2011.634885

Electricity consumption and growth in Eastern Europe: An ARDL

analysis
Melike E. Bildirici and Fazıl Kayikçi
Department of Economics, Yildiz Technical University, Beşiktaş, Istanbul

ABSTRACT KEYWORDS
Knowledge about the direction of causality between electricity consump- ARDL; cointegration;
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tion and economic growth is of primary importance if appropriate energy development; elasticity;
policies and energy conservation measures are to be devised. This study electricity consumption;
estimates the causal relationship between electricity consumption and growth
economic growth at per capita and aggregate levels. The study uses the
price and income elasticities of total electricity demand by using the Auto
Regressive Distributed Lag method for some developing countries in
Europe, Albania, Bulgaria, Czech Republic, Hungary, Poland, Romania, and
Slovakia.

1. Introduction
The relation between economic growth and electricity consumption is a subject that has been
debated and examined with different sets of countries. Central to the debate was whether electricity
consumption stimulates, retards, or is neutral to economic growth. The factors standing in the rear
of the intensive examinations on electricity are the importance of electricity usage in the transition of
economy from agricultural society to the industry and service society, the increase of the usage of
electricity in accordance with sectoral change and transition in production quality, the increase in
life quality, and the act of economic progress as a medium. In this sense electricity usage is the
measure of not also economic progress but also economic growth. Therefore, knowledge of the
direction of causality between electricity consumption and economic growth is of primary impor-
tance if appropriate energy policies and energy conservation measures are to be devised.
The aim of this study is to estimate the relationship between electricity consumption and
economic growth, per capita electricity consumption and per capita income, and electricity con-
sumption and electricity price by the ARDL method in some developing countries of Eastern
Europa. Finding whether there are elasticity differences or not among analyzed countries and the
direction of causality relations are the other analyzed points. In the next section of the study, the
survey of the elasticity, demand forecasting, and causality literatures will be presented. Econometric
theory is identified in the third section. The fourth section consists of the empirical results while the
last section includes conclusions and policy implications.

2. Causality, electricity demand forecast, and elasticity literature

Electricity studies have started with Houthakker’s (1951) work on electricity consumption in the
United Kingdom. Rasche and Tatom’s (1977) study was different from the other studies in the
previous literature about the causality of electricity consumption and economic growth because they
specified a production function for the United States. Kraft and Kraft (1978) found that the

CONTACT Fazıl Kayikçi fkayikci@yildiz.edu.tr Department of Economics, Yildiz Technical University, Barbaros Bulvarı,
34349 Beşiktaş, Istanbul.
© 2016 Taylor & Francis Group, LLC
 ENERGY SOURCES, PART B: ECONOMICS, PLANNING, AND POLICY 259

relationship between energy consumption and GNP for the 1947–1974 period could be approached
with a Sims causality analysis. With the exception of the studies by Wolde-Rufael (2006), Squalli
(2007), and Tang (2008), the majority of the studies do not examine the coefficients with respect to
both sign and magnitude for the relationship between electricity consumption and economic growth
(Payne, 2010).
When the literature is examined, not only technical change and variety but also the theoretical
development line of analysis will be seen obviously. At first, the studies were started at the extent of
energy consumption and then were disintegrated into subcomponents like energy, electricity, and oil
consumption and their relations with GDP and/or economic growth were investigated. Table 5
presents elasticity of electricity demand studies about the East European countries in order to
compare with the results of this study.
Differences in the causality results allow for four hypotheses: (1) the “neutrality hypothesis” (if no
causality exists between GDP and energy consumption; (2) the “conservation hypothesis” (the
unidirectional causal relationship moves from GDP to energy consumption); (3) the “growth
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hypothesis” (the unidirectional causal relationship moves from energy consumption to GDP); and
(4) the “feedback hypothesis’’ (if there is a bidirectional causal relationship between GDP and energy
consumption). Causality studies about the East European countries are presented in Table 1.

3. Data and methodology

3.1. Data
Data consists of the total electricity consumption (EC), per capita electricity consumption (PCEC),
residential electricity consumption (RSEC), electricity prices (ECF), GDP (Y), and per capita GDP
(PCY) for some Eastern European countries: Albania, Bulgaria, Czech Republic, Hungary, Poland,
Romania, and Slovakia. Electricity prices data are available for only Czech Republic, Poland, and
Slovakia. In order to gain from the largest number of observations, real GDP was used for Bulgaria,
Czech Republic, Hungary, and Poland, whereas per capita GDP was used for Albania, Romania, and
Slovakia.

3.2. Methodology
In this paper, the ARDL approach to cointegration involves two steps for estimating a long-run
relationship. The first step is to investigate the existence of a long-run relationship among all
variables. If there is a long-run relationship (cointegration) among variables, the second step is to
estimate the following long-run and short-run models. Panel data method is not used since the aim
of this paper is to see the differences in the electricity consumption behaviors of the countries in the
sample. The ARDL model for the standard log-linear functional specification with an ordinary least
squares (OLS) estimation technique is as follows:
X
m X
m
ΔY ¼ α0 þ βi ΔYti þ ϕi ΔECti þ δ1 Yt1 þ δ2 ECt1 þ εt (1)
i¼1 i¼1
X m X
m
ΔEC ¼ α0 þ βi ΔECti þ ϕi ΔYti þ δ1 ECt1 þ δ2 Yt1 þ εt (2)
i¼1 i¼1
X
m X
m
ΔEC ¼ α0 þ βi ΔECti þ ϕi ΔECFti þ δ1 ECt1 þ δ2 ECFt1 þ εt (3)
i¼1 i¼1
X m Xm
ΔECF ¼ α0 þ βi ΔECFti þ ϕi ΔECti þ δ1 ECFt1 þ δ2 ECt1 þ εt (4)
i¼1 i¼1
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260

Table 1. Causality literature.

Author(s) Country Period Methodology Main variables Causality
Conservation hypothesis
Narayan and Prasad (2008) Hungary 1960–2002 Granger causality GDP, Electricity consumption Y → EC
M. E. BILDIRICI AND F. KAYIKÇI

Chontanawat et al. (2006) Albania, Bulgaria 1971–2000 Granger causality GDP, Energy consumption Y → EC
Growth hypothesis
Kayhan et al. (2010) Romania 2001–2010 Granger causality GDP, Electricity consumption EC → Y

(Toda Yamamoto)
Chontanawat et al. (2006) Poland 1960–2000 Granger causality GDP, Energy consumption EC → Y
Chontanawat et al. (2006) Czech Republic 1971–2000 Granger causality GDP, Energy consumption EC → Y
Narayan and Prasad (2008) Czech Republic, Slovak Republic 1960–2002 Granger causality GDP, Electricity consumption EC → Y
Bohm (2008) Czech Republic, Slovak Republic 1960–2002 Granger causality GDP, Electricity consumption EC → Y
Feedback hypothesis
Öztürk and Acaravci (2010) Hungary 1980–2006 Bound test (ARDL) GDP, Electricity consumption EC ←→ Y
Chontanawat et al. (2006) Slovakia, Romania 1971–2000 Granger causality GDP, Energy consumption EC ←→ Y
Chontanawat et al. (2006) Hungary 1965–2000 Granger causality GDP, Energy consumption EC ←→ Y
Neutrality hypothesis
Narayan and Prasad (2008) Poland 1960–2002 Granger causality GDP, Electricity consumption None
Öztürk and Acaravci (2010) Albania, Bulgaria, Romania 1980–2006 Bound test (ARDL) GDP, Electricity consumption None
Acaravci and Öztürk (2009) 15 East European and Eurasian Economies 1990–2006 Pedroni cointegration GDP, Electricity consumption None
Yu and Choi (1985) Poland 1950–1976 Sims, Granger causality GDP, Electricity consumption None
Soytas and Sari (2009) Poland 1965–1994 Cointegration, ECM GDP, Electricity consumption None
 ENERGY SOURCES, PART B: ECONOMICS, PLANNING, AND POLICY 261

where Δ and εt are the first difference operator and the white noise term, respectively. An appro-
priate lag selection is based on the Akaike Information Criterion (AIC). The bounds testing
procedure is based on the joint F-statistic or Wald statistic that tests the null hypothesis of no
cointegration. That is, H0 : δ1 ¼ δ2 ¼ 0 against the alternative hypothesis H1 : δ1 Þδ2 Þ0 . The
distribution of the test statistics under the null is nonstandard, in which critical values depend on the
order of integration of the variables involved. Thus, rather than using standard critical F statistic
values, the upper (for I(1)) and lower (for I(0)) bounds of the F statistics presented by Pesaran et al.
(2001) are used.1 Then, Vector Error Correction model that was used to analyze the short-run
relationships between the variables was constructed as follows:
X
m X
n
ΔY ¼ α0 þ βi ΔYti þ ϕi ΔECti þ φ1 ECMt1 þ et (5)
i¼1 i¼0

X
m X
n
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ΔEC ¼ α0 þ θi ΔECti þ #i ΔYti þ φ2 ECMt1 þ et (6)

i¼1 i¼0

X
m X
n
ΔEC ¼ α0 þ δi ΔECti þ λi ΔECFti þ φ3 ECMt1 þ et (7)
i¼1 i¼0
X
m X
n
ΔECF ¼ α0 þ ωi ΔECFti þ γi ΔECti þ φ4 ECMt1 þ et (8)
i¼1 i¼0

where residuals et are independently and normally distributed (i.i.d.) with zero mean and constant
variance and ECMt−1 is the error correction term resulting from the long-run equilibrium relation-
ship and β; ϕ; θ ; # ; δ ; λ ; ω; and γ are parameters to be estimated. φ is a parameter indicating the
speed of adjustment to the equilibrium level after a shock. The F statistics on the lagged explanatory
variables of the ECM indicates the significance of the short-run causal effects.
In the last stage, this study used the Granger causality test augmented by the error correction term
for detecting the causal relationship between variables. The advantage of using an error correction
term to test for causality is that it allows for the testing of short-run causality through the lagged
differenced explanatory variables and for the testing of long-run causality through the lagged ECM
term. A statistically significant ECMt−1 term determines the long-run causality going from all of the
explanatory variables toward the dependent variable (Dergiades and Tsoulfidis, 2010). A pth-order,
vector error correction model is given by the following equation:

X
p
ΔZt ¼ α þ ϕi ΔZti þ λECMt1 þ ηt (9)
i¼1

where ηt is i.i.d. with a zero mean and constant variance. Rejecting the null hypotheses indicates that
EC does Granger cause Y, and Y does Granger cause EC; PCEC does Granger cause PCY, and PCY
does Granger cause PCEC.

4. Empirical results
4.1. Unit root tests
In order to test for the presence of stochastic stationarity in this study’s data, this study first
investigated the integration of the individual time-series, using the ADF test. The results reported
in Table 2 clearly show that the levels are nonstationary and the first differences are stationary.
1
The critical values (CVs) are reported in Narayan (2005) for sample sizes ranging from 30 to 80 observations.
 262 M. E. BILDIRICI AND F. KAYIKÇI

Table 2. Unit root test for the variables.

≤TH≥Variable Statistics Variable Statistics Variable Statistics Variable Statistics
ALBANIA BULGARIA
Y −0.956 ΔY −4.377
EC −1.610 ΔEC −6.460
PCY −0.760 Δ PCY −3.135 PCY −1.461 Δ PCY −3.943
PCEC −1.956 Δ PCEC −3.749 PCEC −0.610 Δ PCEC −5.707
CZECH REPUBLIC HUNGARY
Y −1.815 ΔY −3.046 Y −2.014 ΔY −4.380
EC −1.051 ΔEC −4.9075 EC −1.166 ΔEC −5.334
PCEC −2.1603 Δ PCEC −3135 PCEC −1.126 Δ PCEC −3.135
ECF 0.7431 ΔECF −4.380
POLAND ROMANIA
Y −1.080 ΔY −4.163 Y −1.359 ΔY −3.949
EC −1.018 ΔEC −3.590 EC −2.182 ΔEC −5.277
−1.264 Δ PCEC −4.235 −1.72 Δ PCEC −7.2
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PCEC PCEC
ECF 0.216 ΔECF −4.657
SLOVAKIA
EC −1.008 ΔEC −3.891
PCEC −2.157 Δ PCEC −3.891
ECF −1.236 ΔECF −3.587

4.2. Testing for cointegration

The lag length that supplies the smallest critical value is determined as the lag length of the model by
using the AIC. Models were determined after applying the LM
The results of the ARDL bounds tests are shown in Table 3. The null hypothesis of no long-run
relationship can be rejected at 1%, 5%, and 10% levels (only at the 10% level for some countries) of
significance. That means, there is a long-run equilibrium relationship between EC and Y, PCY and
PCEC, EC and ECF, and RSEC and ECF.

4.3. Long-run and short-Run elasticities results

The majority of studies in the literature do not examine the coefficients with respect to both the sign
(positive or negative) and the magnitude of the relationship between electricity consumption and
economic growth. This study analyzed the long- and short-run elasticities. The long-run and short-
run elasticities results with the literature comparisons are displayed in Table 4
The income elasticities of demand have positive sign and are statistically significant both in the
short run and in long run, except for the long-run estimates of Bulgaria and Hungary. This indicates
that electricity consumption is a normal good as it increases with income. The estimated income

Table 3. Bounds testing for cointegration.c

F(Y,PCEC) F(PCEC, Y) F(PCY-PCEC) F(PCEC-PCY) F(ECF-RSEC) F(RSEC-ECF)
F(Y,RSEC)a F(Y,RSEC) F(PCY-RSEC)b F(RSEC-PCY)
ALBANIA – – 4.803 1.924 – –
BULGARIA 3.018 10.788 – – – –
CZECH REPUBLIC 1.974 13.068 – – 1.751 9.918
HUNGARY 2.992 15.744 – – – –
POLAND 0.189 6.399 – – 2.145 6.733
SLOVAKIA – – 1.977 4.871 – –
ROMANIA – – 4.760 2.155 1.586 9.699
a
For Czech Republic, b for Slovakia, c 95% boundaries are 3.39–4.42 for Albania, 3.24–4.26 for Bulgaria, 3.24–4.26 and 3.34–4.43 for
Czech Republic, 3.27–4.29 for Hungary, 3.27–4.29 and 3.40–4.41 for Poland, 3.34–4.47 for Romania, 3.39–4.50 and 3.34–4.43 for
Slovakia.
 ENERGY SOURCES, PART B: ECONOMICS, PLANNING, AND POLICY 263

Table 4. Elasticities results.

Income Price
elasticity Elasticity Elasticity literature
Income Price
SR LR SR LR ECM Author(s) elasticity elasticity
ALBANIA 1.39 0.95 −0.43 Iimi (2011) 0.565
Iimi (2010) 0.164 −0.774
BULGARIA 0.051 −1.62 −0.01 Iimi (2010) 0.089 −0.330
CZECH 0.32 0.73 −0.19 1.809 −0.01 0.68 −0.21
REPUBLIC
−0.02 (ECF model)
HUNGARY 0.12 −0.18 −0.06 Lee (2010) 0.464 0.079
POLAND 0.301 1.86 −0.11 1.92 −0.08 Meyers et al. (1994) 0.25
−0.02 (ECF model)
SLOVAKIA 0.09 2.49 −0.21 1.06 −0.03
0.02(ECF model)
ROMANIA −0.05 Bianco et al. (2010) 0.136(SR) −0.075(SR)
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0.496(LR) −0.274(LR)
Iimi (2010) 0.126 −0.210
Lacko (1999) 18 East European 0.531
Economies

elasticity of electricity demand is income elastic for Poland and Slovakia in the long run and for
Albania in the short run.
The price elasticities have negative signs for all countries and are statistically significant in the
short run as expected. However, elasticities are positive for the long run, which may related to the
weather conditions, high rate of illegal usage of electricity, or other special things for these countries.
The estimated price elasticity of electricity demand in the long run is price elastic for all three
countries in the sample in which price data are available.
ECM coefficients were negative and statistically meaningful, as expected, in nearly all of the
models. The only exceptions for the ECM term to be positive are the price model for Slovakia.
Except Albania, negative ECM coefficients range from −0.01 to −0.08 for other countries, which
indicates that the speed of adjustment is very slow.

4.4. Stability of the cointegration and causality

CUSUM and CUSUM-Q tests were implemented to determine whether the parameters in the
models are stable. Since the sample includes many countries, only the results of CUSUM-Q tests
are presented. It is clear from Figure 1 that parameters are stable; both sum of the residuals and sum
of the squared residuals are moving inside the boundaries.

4.5. Granger causality results

The results in Table 5 show that Granger causalities were present implicitly via the ECM; however, the
equilibrium indicates the presence of unidirectional causality going from one of the variables to the other.
In most of the countries, the causalities are from GDP to the electricity consumption that
supports the conservation hypothesis (Y → EC; PCY → PCEC). These causality results also suggest
relatively low dependence on electricity. The only exception is Romania, in which causality runs
from the electricity consumption to the GDP that supports the growth hypothesis, which means that
electricity consumption acts as a stimulus for economic growth. Energy policies aimed at improving
the energy infrastructure and increasing the energy supply are the appropriate options for Romania
because electricity consumption increases the income level.
 264 M. E. BILDIRICI AND F. KAYIKÇI

Albania Bulgaria
Plot of Cumulative Sum of Squares of Recursive Residuals Plot of Cumulative Sum of Squares of Recursive Residuals
1.4
1.2 1.4
1.0 1.2
0.8 1.0
0.6 0.8
0.4 0.6
0.2 0.4
0.0 0.2
–0.2 0.0
–0.4 0.2–
1981 1988 1995 2002 2008 –0.4 1972 1981 1990 1999 2008

The straight lines represent critical bounds at 5% significance The straight lines represent critical bounds at 5% significance

Czech Republic Hun gary

Plot of Cumulative Sum of Squares of Recursive Residuals Plot of Cumulative Sum of Squares of Recursive Residuals
1.4 1.4
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1.2 1.2
1.0 1.0
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
0.0 0.0
–0.2 –0.2
–0.4 –0.4
1979 1987 1995 2003 2008 1971 1981 1991 2001 2008

The straight lines represent critical bounds at 5% significance The straight lines represent critical bounds at 5% significance

Poland Romania
Plot of Cumulative Sum of Squares of Recursive Residuals Plot of Cumulative Sum of Squares of Recursive Residuals
1.4
1.4 1.2
1.2 1.0
1.0 0.8
0.8 0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
–0.2 –0.2
–0.4 –0.4
1979 1987 1995 2003 2008 1981 1988 1995 2002 2008

The straight lines represent critical bounds at 5% significance The straight lines represent critical bounds at 5% significance

Slovakia
Plot of Cumulative Sum of Squares of Recursive Residuals
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
0.2–
–0.4
1983 1990 1997 2004 2008
The straight lines represent critical bounds at 5% significance

Figure 1. CusumQ tests.

Table 5. Results of Granger causality.

Countries ΔY → ΔEC or ΔPCY → ΔPCEC ΔEC → ΔY or ΔPCEC → ΔPCY t-Test on ECM (ECt−1)
ALBANIA 9.758 1.17 31.29
BULGARIA 28.26 0.25 170.06
CZECH REP. 9.23 0.23 168.89
HUNGARY 25.84 1.12 37.59
POLAND 23.93 1.24 130.80
ROMANIA 1.66 20.88 171.81
SLOVAKIA 15.67 1.99 126.6
Note.In this table, the symbol → shows the direction of causality.
 ENERGY SOURCES, PART B: ECONOMICS, PLANNING, AND POLICY 265

The unidirectional causality goes from economic growth to energy consumption in Albania,
Bulgaria, Czech Republic, Hungary, Poland, and Slovakia, suggesting that the policy of conserving
energy consumption may be implemented with little or no adverse effects on economic growth, such
as in a less energy-dependent economy. This finding also suggests that economic growth may
stimulate increased consumption of electricity.

5. Conclusion
Elasticity results indicate that income elasticity of demand is positive for most of the countries that
electricity consumption is a normal good as it increases with income. The price elasticities have
negative signs for all countries and are statistically significant in the short run as expected. The
estimated price elasticity of electricity demand in the long run is price elastic for all three countries
in the sample in which price data are available. ECM coefficients were negative and statistically
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meaningful, as expected, in nearly all of the models.

There is evidence to support the conservation hypothesis for all other countries in the sample
except Romania. This suggests that the policy of conserving energy consumption may be imple-
mented with little or no adverse effects on economic growth, such as in a less energy-dependent
economy. This is not a theoretically expected outcome for those countries since they are developing
countries. However, there is evidence to support the growth hypothesis for Romania. Energy policies
aimed at improving the energy infrastructure and increasing the energy supply are the appropriate
options for this country because electricity consumption increases the income level.

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