Nexus between energy intensity and capital-output ratio: A holistic approach

Abstract

The incremental capital-output ratio indicates the extent of capital efficiency as firms gradually become technically efficient. Therefore, we aim to empirically assess the linkage between energy intensity and incremental capital-output ratio from a holistic point of view, the first of its kind, by analyzing data from select South Asian countries, lower- and middle-income, and high-income countries. We use standard and robust cross-sectional augmented econometric methodologies for the empirical analysis using data from 1990 to 2018. We reveal unidirectional causation from the incremental capital-output ratio to energy intensity in five South Asian countries and 52 high-income countries. However, bidirectional causality is found between the incremental capital-output ratio and energy intensity for the 34 lower- and middle-income countries. The elasticity of the incremental capital-output ratio to energy intensity for South Asian countries is 0.15 in the long-run. By contrast, the same elasticities for lower- and middle-income and high-income countries are 0.11 and 0.003, respectively. The effect of the incremental capital-output ratio on energy intensity is significantly lower in high-income countries than in the other two groups due to technical inefficiency. Our results are expected to guide the policymakers in developing and emerging economies in adopting optimal policies to achieve efficient and sustainable production and consumption.