The relationship between economic growth, energy consumption and shadow economy in Iran

Understanding the nature of the causal relationship between energy consumption and economic growth is one of the most important and controversial issues in the field of energy economics, which has attracted the attention of researchers and policy makers in the field in the last four decades. Considering the shadow sector of the economy, this study examines Granger-causality between energy consumption, (formal) economic growth, and shadow economy growth for Iran. To this end, the autoregressive distributed lag (ARDL) approach is used to analyze time series data covering the period 1355-1395. The results of cointegration tests and estimation of error correction models indicate that there is a positive bidirectional causal relationship between energy consumption and economic growth in both short-run and long-run, confirming the feedback hypothesis. In addition, there is a positive unidirectional Granger-causality running from shadow economy growth to energy consumption and a negative unidirectional Granger-causality running from shadow economy growth to (formal) economic growth in both short-run and long-run. The findings of this study would have important policy implications for the management of energy consumption and the improvement of economic growth.