Energy Consumption and Economic Growth in Iran: Toda and Yamamoto Causality Test

This study investigates the relationship between energy consumption and economic growth by using Iranian annual time series from 1973-2012. The non-causality approach of Toda and Yamamoto (1995) to causality testing and the bounds testing approach to cointegration, are proposed. In this study, energy consumption is further disaggregated into oil, gas and electricity consumption in order to present more robust analysis. The findings from this study, reveal a unidirectional causal relationship between total energy consumption and economic growth running from total energy consumption to economic growth. This is also true in the case of oil consumption and economic growth with the direction of causality running from economic growth. There is a bidirectional causal relationship between gas consumption and economic growth. The study also shows the there is a unidirectional causal relationship between electricity consumption and economic growth running from electricity consumption to economic growth. The cointegration test identifies long run relationships between total energy consumption and economic growth and also between gas consumption and economic growth. Meanwhile, the cointegration analysis reveals no long run relationship between oil consumption and economic growth and also between electricity consumption and economic growth.