Revisiting the causality between electricity consumption and economic growth in South Africa : a bootstrap rolling-window approach

Abstract

This paper revisits the causality relationship between electricity consumption and economic growth in South Africa for the period 1972-2009 using annual data and takes into consideration time variation in causal relationships using bootstrap rolling Granger noncausality tests. Full-sample Granger causality tests find absence of any causality between electricity consumption and economic growth. However, Parameter stability tests indicate that there is instability in our VAR model and therefore findings from full-sample Granger causality test cannot be relied upon. This motivates the use of bootstrap rolling window estimation to investigate the electricity consumption-growth nexus which accounts for the time varying causal link between the two variables. The results indicate two sub periods, 2002-2003 and 2005-2006, whereby electricity consumption had a causal effect on GDP supporting the growth hypothesis. The policy implication is that energy conservation policies could be a hindrance on economic growth since electricity consumption seems to be the driving force behind GDP during these sub periods. Apart for these brief sub periods, the results indicate no causality between the two series. On the contrary, we find that GDP has no predictive power over electricity consumption for the entire sample considered.