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The Causal Relationship between Energy Consumption and Economic Growth:

An Empirical Analysis for Bangladesh

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 Thoughts on Economics
Vol. 32, No. 01 & 02, 2022

The Causal Relationship between Energy Consumption

and Economic Growth: An Empirical Analysis for
Bangladesh
Jasmin Akter, Puja Bhattacharjee, Rifat Ara Bindu, Nusrat Jahan *
Abstract: The goal of this study is to investigate the causal relationship between energy
consumption and economic growth in Bangladesh using data over the period 1973-2017. In
doing so, general production function has been estimated using per capita GDP, per capita
energy consumption and capital-labor ratio, based on Error Correction Model. All variables are
stationary at first difference or I (1) and Johansen cointegration approach shows one
cointegrating equation. According to the Vector Error Correction method long-run relationship
exists in all the variables but there is no short-run relationship among the variables. Moreover,
unidirectional causality is running from energy consumption to economic growth in the long-
run. This causality suggests that energy consumption is a stimulating input for economic growth
in Bangladesh. Besides, the error correction term shows that the economy will correct its
disequilibrium at 5 percent speed every year.
Keywords: Energy Consumption, Economic Growth, Johansen Cointegration Approach, Error
Correction Model, Granger Causality
JEL Classification: C32 Q43

1.0 Introduction
Energy is a pivotal element in accelerating socio-economic conditions as well as in
economic growth of a country (Mujeri et al). As a developing country, energy
consumption is rapidly increasing in Bangladesh due to population growth, tremendous
progress of industrialization and technological advancement (M.N. Uddin et al).
Electricity, natural gas, petroleum products, coal, oil, fossil fuel, biomass, solar and
other renewable resources are the main indigenous energy resources of Bangladesh
(Energy Scenario Bangladesh).
Bangladesh’s energy consumption portfolio is largely dominated by natural gas which
is almost 71 percent of the total commercial use of energy followed by electricity. After
the independence in 1971, only 3 percent of the total population had access to
electricity, which the ratio goes up to 96 percent in 2020. The government has set a
vision of 100 percent electrification in 2021. The major portion of total primary energy
consumption goes to natural gas (25 percent), solid biomass and waste (62 percent),
which are followed by oil (12 percent), coal and hydro (1 percent for both). It has been
recorded that the domestic household sector consumes about 43 percent while the
industrial sector consumes 44 percent of the total produced electrical power

*Authors are Assistant Director, Research Department, Bangladesh Bank, Dhaka, Bangladesh. Disclaimer:
The views expressed in this paper are solely of the authors and do not necessarily reflect the views of the
institution in which they work.
26 The Causal Relationship between...... / Jasmin, Puja, Rifat, Nusrat

(Taheruzzaman & Janik). The scenario of per capita energy consumption has shown in
the following figure.
Figure 1: Energy Consumption in Bangladesh
250
Energy Consumption

200
(per capita)

150
100
50
1980 1990 2000 2010 2020
Year
Source: World Development Indicator, World Bank
However, Bangladesh is one of the world’s lowest energy producers too. The total
annual energy supply is only about 150 liters of oil equivalent per capita. Total 961.7
billion cubic feet (BCF) gas and 12,893 megawatt net power energy have been
generated during the fiscal year 2018-19. About 81.72 percent of natural gas has been
used in total electricity generation. The Karnafuly Hydro Power Station which is the
only hydropower station operated by BPDB (Bangladesh Power Development Board)
is considered increasing production up to 330 megawatts. Furthermore, 27 gas fields
have been discovered in which Petrobangla and BAPEX (Bangladesh Petroleum
Exploration and Production Company Limited) have been making worthy efforts. In
addition, the country reserves about 13.27 lakh metric tons of fuel oil (Bangladesh
Economic Review 2020).
Domestic energy supply is not enough to meet the rising demand for electricity and
natural gas yet. Thereby, the country has imported oil, LPG and electricity from
neighboring countries. Besides, for sustainable economic growth, an effective energy
policy has been taken by the government. Sustainable and Renewable Energy
Development Authority (SREDA) has been established in 2014. Apart from reducing
the dependence on natural gas, the government has taken various steps to produce
electricity through coal, dual fuel, nuclear power (Rooppur Nuclear Power Plant) and
other renewable resources (Bangladesh Economic Review 2020).
The above discussion shows a glimpse of the overall energy consumption scenario of
Bangladesh from which we can assess the strong interdependence and causality
between energy consumption and economic growth. For that, per capita energy
consumption and per capita GDP along with capital-labor ratio have been used to
Thoughts on Economics Vol. 32, No. 01 & 02, 2022 27

investigate the existence of causality between energy consumption and economic

growth in Bangladesh.
The remainder of this paper is organized as follows: Section 2 reviews the literature,
Section 3 describes the estimation method, Section 4 presents the empirical results and
Section 5 provides a conclusion with some policy implications.

2.0 Literature Review

For the last few decades, the direction of causality between energy consumption and
economic growth is empirically more attractive and controversial topic relying on the
methodology, country and time period.
Although there are several empirical studies on the causal relationship between energy
consumption and economic growth, the direction of the causality is not clearly defined.
Albeit with mixed results, some studies have found a unidirectional causal relationship,
while some have found bidirectional relationship between energy consumption and
growth. Conversely, many of the studies have found no causal relationship between
them.
A unidirectional causal relationship between energy consumption and economic
growth was found in pioneer work by Kraft and Kraft (1978), followed by Aqeel and
Butt (2001), Lee (2005), Dhungel (2008), Narayan and Smyth (2008), Choudhry et al
(2012), Ozturk et al (2011) etc. A seminal paper by Kraft and Kraft (1978) showed that
the unidirectional causality ran from GNP growth to energy consumption for the United
States of America for 1947-1974 applying Sims methodology. Aqeel and Butt (2001)
investigated the causal relationship between energy consumption and economic growth
for Pakistan for the period of 1955-56 to 1995-96 by employing the cointegration
approach and Hsiao’s version of Granger causality. They have found that economic
growth causes total energy consumption in Pakistan. Lee (2005) examined the energy
consumption and real GDP in a panel of 18 developing countries for 1975-2001. They
used panel unit root, heterogeneous panel cointegration and panel-based error
correction model. They found the variables were cointegrated and causality ran from
energy consumption to real GDP.
Dhungel (2008) has applied cointegration approach and VECM for Nepal from the
period 1980-2004 to investigate the causal relationship between the per capita
consumption of coal, electricity, oil and total commercial energy and the per capita real
gross domestic product (GDP). The findings show that a unidirectional causality is
running from coal, oil and commercial energy consumption to per capita real GDP
whereas a unidirectional causality is running from per capita real GDP to per capita
electricity consumption which suggests that per capita energy consumption revives
better economic growth in Nepal. At the same time, Narayan and Smyth (2008)
examined the relationship between capital formation, energy consumption and real
GDP in G7 countries by using panel unit root, panel cointegration, Granger causality
and long-run structural estimation. The findings are capital formation and energy
consumption Granger cause real GDP positively in the long run.
28 The Causal Relationship between...... / Jasmin, Puja, Rifat, Nusrat

Segregating energy consumption into oil, gas, coal and electricity consumption,
Choudhry et al (2012) found the direction of the causal relationship between energy
consumption and economic growth in Pakistan. The results conclude that energy
consumption and economic growth are closely related and a unidirectional causality
exists between them. They have shown that the GDP growth of Pakistan is dependent
on all sources of energy consumption. Ozturk et al (2011) studied the short-run and
long-run relationship and causality for the period of 1960 to 2006 between energy
consumption and economic growth for Turkey by employing Johansen-Juselius
cointegration method and VECM. They have revealed that there is no short-run
causality both in energy consumption and GDP growth but long-run causality is
running from per capita GDP to per capita energy consumption.
Yu and Choi (1985), Erol and Yu (1987), Joyeux and Ripple (2007) and Abalaba and
Matthew (2013) found no causal relationship between energy consumption and
economic growth in their studies.
Yu and Choi (1985) tested data for the United Kingdom for the period 1950-1970 found
that energy consumption and GDP are independent. Erol and Yu (1987) employed data
on six industrialized countries for 1947-1979 and found no significant causal
relationship between energy consumption and GDP growth. Besides, Joyeux and
Ripple (2007) applied a panel cointegration test for seven East Indian Ocean countries
and the finding was that energy consumption and real GDP were not cointegrated.
Abalaba and Matthew (2013) evaluated the long-run relationship and direction of
causality between energy consumption and economic growth during the period of
1971-2010 for Nigeria regarding financial development, monetary policy rate and
consumer prices. The findings give weak evidence for a long-run relationship that is
there is no long-run impact on economic growth but has a short-run positive impact of
energy consumption on economic growth. Also, they found no causal relationship
between energy consumption and economic growth.
Zou and Chau (2005), Dagher and Yacoubian (2012) and Saidi and Hammami (2014)
found a bidirectional causal relationship between energy consumption and economic
growth in their studies.
Zou and Chau (2005) used time-series data from 1953 to 2002 to examine both the
equilibrium relationship and the predictability between oil consumption and economic
growth in China. They applied cointegration and Granger causality tests. The findings
indicate that oil consumption and economic growth tend to move together in the long
run. The immense use of oil has massive effects on China’s energy consumption
structure in the short-run as well as in the long run.
Whereas, Dagher and Yacoubian (2012) showed a dynamic causal relationship between
energy consumption and economic growth are investigated over the period 1980-2009
in Lebanon by employing Hsiao, Toda-Yamamoto and VEC based Granger causality
test and the evidence reveals that a bidirectional relationship exists between energy
consumption and economic growth both in the short-run and long-run in Lebanon.
Thoughts on Economics Vol. 32, No. 01 & 02, 2022 29

Saidi and Hammami (2014) have examined the data for 1974-2011 in Tunisia using the
Johansen cointegration technique found that a bidirectional causal relationship exists
between energy consumption and economic growth in the long-run.
Several investigations by Glasure and Lee (1997), Asafu-Adjaye (2000), Soytas and
Sari (2006), Huang et al (2008), Rafiq and Salim (2011), Azam and Emirullah (2015)
found mixed results using panel data series for different countries.
Glasure and Lee (1997) applied the standard Granger test as well as the cointegration
and error correction model for South Korea and Singapore. It indicated bidirectional
causality between income and energy for both counties. But the standard Granger
causality test found no causal relationship between energy consumption and GDP for
South Korea but unidirectional causality runs from energy consumption to GDP for
Singapore in the short run. An estimation by Asafu-Adjaye (2000) for India, Indonesia,
the Philippines and Thailand using cointegration and error correction modeling
techniques showed that unidirectional Granger causality runs from energy to income in
the short run. On the other hand, bidirectional Granger causality runs from energy to
income for Thailand and the Philippines in the short run. They have also found that
energy income and prices are mutually causal for Thailand and the Philippines.
Conversely, neutrality between energy and income has been observed in the short-run
in Indonesia and India.
Soytas and Sari (2006) tested causality between energy consumption and GDP for each
of the G7 countries and have found bidirectional causality between energy consumption
and GDP in Canada, Italy, Japan and the United Kingdom, whereas unidirectional
causality is running from energy consumption to GDP in France and Unites States and
no causality is running from GDP to energy consumption in Germany.
Huang et al (2008) used panel data from 1972-2002 for 82 countries of energy
consumption and economic growth estimated panel VAR model employing the GMM-
SYS approach. They classified these countries into four groups based on the income
levels defined by World Bank: low-income group, lower-middle-income group, upper-
middle-income group, and high-income group. According to their findings (a) no
causality exists between energy consumption and economic growth in the low-income
group (b) unidirectional positive relationship from economic growth to energy
consumption in the lower and upper-middle-income groups and (c) negative causal
relationship exists in the high-income group.
Rafiq and Salim (2011) made a research on six emerging economies of Asia based on
cointegration and VECM approach with generalized variance decompositions and
impulse response function. The estimation results revealed unidirectional short-run and
long-run causality existed between energy consumption and GDP for China,
unidirectional short-run causality ran from output to energy consumption for India,
bidirectional short-run causality for Thailand and no causal relationship between
energy consumption and income for Indonesia, Malaysia and the Philippines.
Azam and Emirullah (2015) studied the causal relationship between energy
consumption and economic growth in the ASEAN-5 countries of Indonesia, Malaysia,
30 The Causal Relationship between...... / Jasmin, Puja, Rifat, Nusrat

Thailand, Singapore and the Philippines. They have used Johansen cointegration and
Granger causality test. The findings exhibit that energy consumption has a significant
and long-run relationship to economic growth for almost all ASEAN- 5 countries.
In response to the study conducted by Ozturk et al (2011), the present study accommodates
per capita term of variables like per capita energy consumption, per capita GDP and
capital-labor ratio and estimates a general production function. The exception of this study
is that it focuses on Bangladesh context. The interest of this paper lies in the following.
Before applying the econometric model, we perform unit root test as a battery of the pre-
testing procedure. Then, we employ the cointegration test by Johansen (1988) and
Johansen-Juselius (1990) instead of the Engle-Granger (1987) cointegration test. Finally,
we estimate an error correction model rather than VAR model. Since VAR model is mis
specified in the presence of cointegration and cannot identify the short run and long run
relationship between the variables and, cannot detect the source of causation as well.
While, error correction model specifies the long-run and short-run relationship as well as
long-run and short-run causality.

3.0 Data and Econometric Methodology

3.1 Variables & Data Sources
The target variables of this study are economic growth and energy consumption. In this
regard, we used per capita GDP and per capita energy consumption as a proxy of
economic growth and energy consumption respectively. Another co-variable is capital-
labor ratio which is measured by the ratio of gross capital formation and total labor
force. Gross Capital Formation is used as proxy of capital. The time series data from
1973-2017 have been chosen to analyze. Econometric software Eviews-9 is used to
formulate the estimations. The following table summarized the list of variables,
description, notation and data sources.
Table 1: Variables, Description and Data Sources
Variables Description Notation Sources
GDP GDP Per Capita (constant LCU) GDP World Development Indicator
(WDI)
Capital Gross Capital Formation (constant K World Development Indicator
LCU) (WDI)
Labor Total Labor Force L Bangladesh Bureau of Statistics
(BBS)
Energy Energy Consumption (kg of oil EC World Development Indicator
Consumption equivalent per capita) (WDI)

3.2 Model Specification

Basically, the neoclassical growth model considers labor, capital and technology as the
main factors of production, where energy plays an indirect role as it considers an
intermediate input in this approach (Stern, 1999). Endogenous Growth theory, the more
recent model, focuses on capital, investment along with research and development. All
the models based on this approach remain qualitative and theoretical and, the proposed
Thoughts on Economics Vol. 32, No. 01 & 02, 2022 31

core variables (knowledge, human capital) are not easily quantifiable. Regarding
technology in energy sector, each technology has its own cost-benefit. These new
growth theories incorporated energy as an explicit factor of production and addressed
the fact that equally endogenous energy-saving technical change will be essential to
make the growth sustainable in practice (Nela & Sasa, 2010).
Today, developing countries are the highest energy intensive economies, aiming to
increase the energy efficiency. This is why, we used energy consumption as a factor of
production. Thereby, to see the causal relationship between energy consumption and
economic growth, the production function will be:
𝐺𝐷𝑃𝑡= 𝛽0+ 𝛽1𝑘𝑡+ 𝛽2𝐸𝐶𝑡+ 𝜀𝑡…………………………………….(1)
Where, 𝐺𝐷𝑃𝑡, 𝑘t and 𝐸𝐶𝑡 are per capita GDP, capital-labor ratio and per capita energy
consumption respectively. 𝛽0 is constant and 𝜀𝑡 is the white noise error term.
Taking logarithm in both sides-
L𝐺𝐷𝑃𝑡= 𝛽0+ 𝛽1L𝑘𝑡+ 𝛽2𝐿𝐸𝐶𝑡+𝜀𝑡 (2)
Here, L𝐺𝐷𝑃𝑡, L𝑘𝑡 and L𝐸𝐶𝑡 are per capita GDP, capital-labor ratio and per capita energy
consumption in natural logarithm respectively.
As the model is in logarithmic form, the coefficients will interpret elasticity.
Therefore, our focus will be on the magnitude of 𝛽1 and 𝛽2, that is, the change in
capital-labor ratio and per capita energy consumption. It means that change in capital-
labor ratio and per capita energy consumption will change in economic growth.
3.3 Estimation Method
Because of the lag structure, unit root, dynamic and multivariate aspect we used
Johansen Maximum Likelihood Error Correction Model in this study (Hossain, 2003).
The test procedure is followed by estimating a Vector Autoregressive (VAR) model.
It includes levels and differences of the non-stationary variables. Although co-
integration test considers the long-run property, it does not deal with the short-run
dynamics. Error Correction Mechanism (ECM) is used for correcting short-run
disequilibrium in the long- run. If the VAR variables are cointegrated, the VAR model
is converted to VECM. In the VECM framework, the long-run equilibrium is
expressed as the error correction term, the sign must be negative and significant for
holding long-run equilibrium. This negative sign implies that any disequilibrium in
the short-run will converge to the long-run equilibrium. The lagged dynamic terms
represent the short-run dynamics, irrespective of sign but should be individually
significant. If these parameters are jointly significant, then short-run causality will
exist in the model. Furthermore, in the presence of a significant error correction term
and a lagged dependent variable, if an independent variable appears to be statistically
significant, then this particular independent variable is said to Granger cause the
dependent variable (Hossain, 2003).
32 The Causal Relationship between...... / Jasmin, Puja, Rifat, Nusrat

4.0 Results and Discussions

4.1 Unit Root Test
In this study, different unit root tests are utilized to determine the stationarity of the
series. The findings of the ADF test, PP test and KPSS test have given in table 2. All
the series are non- stationary at level but stationary at first difference. Therefore, all
the variables are integrated of order 1or I(1). This is the first fundamental criteria to
test the relationship among the variables.
Table 2: Results of Unit Root Tests
Variables ADF Test PP Test KPSS Test Decision
LGDP 3.952169 5.965150 0.816014* Non-stationary
L(k) 0.713199 0.713199 0.861237* Non-stationary
LEC 1.213852 1.957281 0.835124* Non-stationary
D(LGDP) -6.341299* -6.738423* 0.376749*** Stationary
D(L(k)) -3.240010** -3.450303** 0.242025 Stationary
D(LEC) -8.224015* -8.205224* 0.427643*** Stationary
Note: *, ** and *** depict 1%; 5% and 10% level of significance respectively.
The ADF and PP test results indicate that all the variables are not stationary at level
even at 10% level of significance but stationary at their first difference. Similarly, the
KPSS test results indicate the acceptance of an alternative hypothesis which states a
series of variables is not stationary in the level values.
Thereby, the level values of all the variables are rejected at 1% level of significance
and accepted at first difference in which variables are stationary.
Table 3: Results of Residual’s Unit Root Test
Variable t-statistics Probability
Residual -3.003450** 0.0423
Note: ** depicts 5% level of significance.
As the stationary results show the residual is stationary at level, it assures that the
regression model is not spurious.
4.2 Empirical Results Based on Cointegration Estimation
An unrestricted VAR (Vector Autoregression) model has been built to test the existence
of cointegration among per capita GDP, capital-labor ratio and per capita energy
consumption. The unrestricted VAR model is-
VAR: (𝐿GDP𝑡, (𝐿𝑘𝑡), 𝐿𝐸𝐶𝑡)
As the variables are I(1), they all are cointegrated and their cointegration can be
represented in an error correction model.
Before performing the Johansen cointegration test, an appropriate lag length has
Thoughts on Economics Vol. 32, No. 01 & 02, 2022 33

chosen, as too many lags reduce the degrees of freedom. The optimal lag 1 is selected
for VAR and VECM, by the different lag length criteria. The results of Johansen
cointegration test presented in Table 4 and Table 5.
Table 4: Cointegration Rank Test (Trace)
Null Alternative Eigenvalues 𝜆𝑡𝑟𝑎𝑐𝑒 statistic 0.05 Critical Value Prob
r=0* r=1 0.503862 42.60066 29.79707 0.0010
r≤1 r=2 0.236781 12.46192 15.49471 0.1361
r≤2 r=3 0.019412 0.842903 3.841466 0.3586

Note: r denotes the number of cointegrating vectors.

Table 5: Cointegration Rank Test (Maximum Eigenvalue)
Null Alternative Eigenvalues 𝜆𝑚𝑎𝑥 statistic 0.05 Critical Value Probability
r=0* r≥1 0.503862 30.13875 21.13162 0.0021
r≤1 r≥2 0.236781 11.61901 14.26460 0.1258
r≤2 r≥3 0.019412 0.842903 3.841466 0.3586

Note: r denotes the number of cointegrating vectors. 𝜆𝑚𝑎𝑥 is maximum eigen values and 𝜆𝑡𝑟𝑎𝑐𝑒 is
trace test statistics.* denotes the rejection of the null hypothesis at the 5% level of significance.
Results in table 4 and table 5 suggest that the null hypothesis of no cointegration
among the variables is rejected at 5% level for both 𝜆𝑡𝑟𝑎𝑐𝑒 and 𝜆𝑚𝑎𝑥statistics. Both trace
test and maximum eigen value test indicate 1 cointegrating equation.
4.3 Vector Error Correction Model
The presence of a long-run relationship among the variables can be shown through
VECM framework. After normalizing on LGDP, the long-run estimates of
cointegrating vectors are presented as follows:
Table 6: Long-Run Estimates
Constant L(k) LEC
Coefficient 3.510166 -0.004458 -2.763754
Std. Dev. ----- 0.00197 0.53728
t-statistics ----- -2.26226* -5.14394*
Note: * depicts 5% level of significance

Thereby, the long-run equation will be the following:

LGDP = -3.510166 + 0.004458 L(k) + 2.763754 LEC
Table 6 shows that long-run coefficients of L(k) and LEC are statistically significant.
Capital-labor ratio is positively related with per capita GDP which implies that a one
percent increase in capital-labor ratio will increase per capita GDP 0.004 percent.
Similarly, per capita energy consumption is positively related with per capita GDP. If
34 The Causal Relationship between...... / Jasmin, Puja, Rifat, Nusrat

per capita energy consumption increases one percent, per capita GDP will increase
2.76 percent. It indicates that more energy consumption will enhance the economic
growth. The error correction term which is obtained from the long-run equilibrium is
given below:
∅𝑙𝑔𝑑𝑝𝐸𝐶𝑡−1 = LGDP - 0.004458 L(k) - 2.763754 LEC
Table 7: Error Correction Term
Error Correction Term Coefficient Std. Deviation t-value
𝐸𝐶𝑡−1 -0.047991 0.00866 -5.54378

The estimated error correction equation for LGDP shows the error correction term is
statistically significant and holds the theoretically correct sign. The negative sign
indicates that the economy will move toward its equilibrium. The absolute value of
the coefficient (∅) of the error term 𝐸𝐶𝑡−1 is 0.05, describes about the economy which
will restore the equilibrium at about 20 time periods. In other words, the rate of speed
of adjustment is 5% which corrects the previous period disequilibrium. The estimated
error correction equations are represented in Table 8:
Table 8: Error Correction Estimates
Dependent Variable: ∆LGDP
Regressors Coefficient Std. Dev. t-statistic
Constant 0.038430 0.00472 8.14398**
𝐸𝐶𝑡−1 -0.047991 0.00866 -5.54378*
∆LGDP(-1) -0.375270 0.18189 -2.06315*
∆𝐿EC(-1) -0.064701 0.09163 -0.70608
∆L(k)(-1) -0.017644 0.02318 -0.76122
𝑅2 = 0.654783
Adjusted 𝑅2 = 0.618444
F-Statistics = 18.01890
Note: * and ** denote significance at 5% and 10% level.
The findings from table 8 present the lagged value of LEC𝑡, 𝐿𝐺𝐷𝑃𝑡 and L(k)𝑡. Though
the lagged value of LGDP is significant but has negative impact on present value of
LGDP. Both energy consumption and capital-labor ratio have no significant impact
on the present value of LGDP. It implies that there is no short-run relationship
between per capita energy consumption and per capita GDP as well as capital-labor
ratio and per capita GDP.
4.4 Causality Test
As the lagged values of L(𝑘) and 𝐿𝐸𝐶𝑡 are statistically insignificant, the presence of
significant error correction term does not imply Granger causality. Through the
VECM framework, the long-run and short- run causality are performed by Wald Test
except intercept term are shown in table 9.
Thoughts on Economics Vol. 32, No. 01 & 02, 2022 35

Table 9: Long-Run and Short-Run Causality through Wald Test

Hypothesis: Causality from other variables to LGDP Long-Run Short-Run
LEC, L(k) LGDP 30.73351*
LEC LGDP ----- 0.498550
L(k) LGDP ----- 0.579451
Note: The degrees of freedom for the Chi-square statistics are 1 for long-run and short-run
causality.
Indicates “Granger causes* depicts 10% level of significance.
Table 9 presents that per capita energy consumption and capital-labor ratio Granger
cause per capita GDP in the long-run but does not Granger cause per capita GDP in
the short-run.
4.5 Residual Diagnostic Tests
To test the health of the estimated model, various statistical tests have been performed.
These are presented in the following table.
Table 10: Diagnostic Test
Test Statistics Test F-statistics Probability
Normality Test Jarque-Bera 0.382333 0.825995
Serial Correlation Breusch-Godfrey 4.235060 0.0567
Heteroscedasticity Breusch-Pagan-Godfrey 2.065182 0.0819

The findings from table 10 suggest that the error terms are normally distributed which
is found from Jarque-Bera statistics. Also, the results of Breusch-Godfrey test and
Breusch-Pagan-Godfrey test indicate that the residual terms are free from serial
correlation and heteroscedasticity.

5.0 Conclusion and Policy Recommendations

The study examines the causal relationship between energy consumption and the
economic growth of Bangladesh over the period from 1973 to 2017. The traditional
Augmented Dicky-Fuller (ADF) test, Philips-Perron (PP) test and Kwiatkowski-
Philips-Schmidt and Shin (KPSS) test are employed to test the stationarity. All the
unit test results show that the variables are non-stationary at level but stationary at
first difference. As the variables are I(1), the Johansen cointegration approach is
applied. Both the trace test and maximum eigenvalue test statistics indicate one
cointegrating equation. Vector error correction model shows that per capita energy
consumption, capital-labor ratio and per capita GDP have had a positive long-run
relationship. If per capita energy consumption increases one percent, per capita GDP
will increase 2.76 percent and the speed of adjustment is 5 percent. According to
VECM based Granger causality test, per capita energy consumption and capital-labor
36 The Causal Relationship between...... / Jasmin, Puja, Rifat, Nusrat

ratio Granger cause economic growth in the long run. The estimated model is free
from the issue of autocorrelation, heteroscedasticity. The residuals of the model are
normal too.
The limitation of the study is a small sample size. The present work has taken only 44
observations, where a minimum of 200 observations need to apply cointegration
method. Some of the data in the analyzed time period were not available and those
data have been interpolated and extrapolated. Another limitation has been found in
OLS estimation. A serial correlation exists in OLS estimates.
The results of the study are consistent with the energy-dependent hypothesis. From a
policy purpose, the findings suggest that energy consumption is one of the key factors
that will influence the economic growth. The energy sector needs an integrated
analysis to maximize the benefit of scarce resources (gas). As the affordability of
electricity is determined by the availability of gas, it (gas) should be used in combined
cycle plants.
To make a prudent and time-bound policy for implementation, the energy sector
should undertake a detailed agenda including the progress of implementation of the
energy sector reform agenda and identify the specific implementation constraints.
Moreover, the country would have to shift to renewable sources of energy to maintain
sustainable energy growth. In addition, regional cooperation should be enhanced
especially in case of hydropower and natural gas.

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