The Relationship Between Energy Consumption and GDP : A Causality Analysis on Balkan Countries

This study examines the causal links between energy consumption (EC) and economic development, as measured by Gross Domestic Product (GDP) for four Balkan countries (i.e. Greece, Bulgaria, Romania and Albania) during the period 1980-2009. Energy is a key source of economic growth because many production and consumption activities involve energy as a basic input. Therefore, it is important to investigate whether energy conservation policies may be pursued without adversely affecting economic development. The Granger Causality test results using Vector Auto Regression (VAR) estimates and the Error Correction Model imply that there is a one-way causality running from GDP to EC for Greece. This means that increase in economic growth requires enormous consumption of total energy and energy conservation policies do not harm economic growth. On the other hand, evidence show unidirectional causal links running from EC to GDP for Bulgaria and Romania. In this case, energy consumption can be viewed as a leading indicator of economic growth for these two Balkan countries, which means that energy conservation policies are likely to affect economic growth. Finally, empirical results for Albania suggest that EC and GDP are independent, which favours neutrality hypothesis. Therefore, energy conservation policies may not effect economic growth