Energy consumption and economic growth nexus in the Baltic countries: causality approach

Abstract

The relationship between energy consumption and economic growth has been a hot issue in academic research. The results of the investigations have been varied due to quite different national economic development and diversity of research methods as well. This paper investigates the causal relationship between energy consumption and economic growth in the Baltic countries, such as Lithuania, Latvia and Estonia in the period of year between 1995 and 2012. To that end, Granger causality test is applied in order to suggest which variable in the model has significant impact on the future value of other variable in the system. Based on the causal relationship, regression model has been employed for the estimation of interrelationship between energy consumption and economic growth. The empirical results could be summarized as following: 1) in terms of correlation analysis between energy consumption and economic growth, there is a weak and insignificant relationship for Lithuania, strong and significant for Latvia and moderate one for Estonia; 2) in terms of causality running from GDP to energy consumption, the causal relationship exists for Estonia. The main implication of this finding is that the energy conservation policies will not have impact on economic growth; moreover, the results of the research highlight the absence of Granger causality between variables observed in the case of Lithuania and Latvia. In this light, national energy policies will not have impact on economic growth as well as economic growth will not has influence on energy consumption.