Causal Relationship Between Electricity Production and Macroeconomic Indicators: Cross Countries Analysis

Abstract

Today, many developing countries are facing severe shortage of electricity production in their economies which results into a widening gap between electricity production and consumption. This paper employs three-step methodology of Unit Root, Johansen Cointegration, and Vector Error Correction Mechanism to examine whether there exists short-, long-run, uni-, or bi-directional causality among economic growth, electricity production, and inflation for three South Asian economies namely, India, Pakistan, and Bangladesh covering the period 1973-2014. This paper finds the neutrality hypothesis in the short run for India, Pakistan, and Bangladesh. For the long run, the test result indicates that different hypothesis exists for the three countries under the analysis. This implies that policies and strategies for increasing the installed capacity of electricity generation can lead towards prosperous economic growth in the long run.