Hydroelectricity consumption and economic growth nexus : evidence from a panel of ten largest hydroelectricity consumers

Abstract

This paper explores the long-run and causal relationships between hydroelectricity consumption and economic growth for a panel of the 10 largest hydroelectricity consuming countries over the period 1965 to 2012. The countries include Brazil, Canada, China, France, India, Japan, Norway, Sweden, Turkey and the U.S.A. Using the Bai and Perron (2003) tests for cointegration, the results indicate that real GDP per capita and hydroelectricity consumption per capita appear to be cointegrated around a broken intercept. Granger causality results from a nonlinear panel smooth transition vector error correction model suggest different results depending on the regimes, which we identified based on structural break tests. The test identified three breaks at 1988, 2000 and 2009. For the pre-1988 period, there is evidence of unidirectional causality running from real GDP per capita to hydroelectricity per capita in both the short- and long-run. Over the post-1988 period, there exists evidence of bidirectional causality between hydroelectricity energy consumption per capita and real GDP per capita in both the short- and the longrun. The results imply the existence of a feedback hypothesis with both hydroelectricity consumption and growth promoting each other in more recent periods, as the importance of hydroelectricity as a renewable energy, has become more prominent.