Fractional cointegration, Energy Consumption and Growth Revisited: Evidence from Taiwan
Per-Ola Maneschiƶld

Taiwan is increasingly dependent on energy for its growth and development. This is partly related to the encouragement to export and expand into the international market, which establish the foundation for its economic development since the export oriented policy in the 1960s. As a result and for realizing the future development and growth objectives, the relationship between GDP and energy consumption is of a central concern. This paper adds to the literature and its mixed results by analyzing causality between growth and energy consumption in the case of fractional cointegration using annual data for Taiwan. With some exceptions, there is evidence of a fractionally cointegrated process with a mean-reverting nonstationary long memory. The result of the causality tests incorporating fractional cointegration emphasize that an energy conservation policy implies a negative effect on growth in Taiwan with energy acting as an engine of growth. Thus, an energy conservation policy as part of a policy to optimize the use of a scarce resource as well as to reduce pollution can lead to a fall in growth. Furthermore, evidence related to weak exogeneity interpreted as a test of long-run causality can explain the evidence of a mean-reverting process, i.e. supporting a relationship between the variables in the long run but only very weakly. As a result concerning policy analysis of the empirical relationship between growth and energy consumption, the issue of fractional cointegration needs to be taken into account.

Full Text: PDF     DOI: 10.15640/jeds.v3n1a3