Causality and Cointegration between Economic Growth and Energy Consumption: Econometric Evidence from Jordan

This paper aims at determining the relationship between economic growth and energy consumption in Jordan within the neo-classical productivity theory framework where capital, labour and energy are treated as separate production factors. It constructs an econometric model using annual time series data covering the period 1970– 2011. After estimating the parameters of the model, it uses causality tests to examine the existence and direction of causality between output growth and production factors including energy consumption. Empirical findings suggest that there exists Granger causality running from GDP to energy consumption, but there is no Granger causality running from energy consumption to GDP. The implication being that energy supply constraints could be introduced with little or no impact on economic growth. This unidirectional causality provides empirical evidence that Jordan is a less energy-dependent economy. Such findings undermine the theory of energy conservation policies and support the Government policies that aim at raising the prices of energy and reducing public demand for energy consumption mainly to reduce the deficit of government budget, foreign debt, and its services.