The impact of uncertainty in economic policies on energy intensity in Iran

Energy intensity in the Iranian economy has always been on the rise. In this study, the only factor affecting energy intensity is the uncertainty in economic policies. It is important to determine a comprehensive measure of economic uncertainty that reflects the overall level of uncertainty in the economy. To build the index of uncertainty in economic policies, uncertainty in foreign exchange, monetary and fiscal policies has been used using the EGARGH approach. Then, the effect of uncertainty in economic policies on energy intensity has been estimated with the self-explanatory model with distributive intervals (ARDL) model during 1973-2018. The findings show that one percent increases in the index of economic uncertainty in current period, second year, and third year have positive and significant effects on energy intensity. The magnitudes of such effects are equal to 0.12, 0.11 and 0.06 percent, respectively. These results show that uncertainty in economic policies increases energy intensity. If uncertainty in economic policies goes up, firms cannot plan to manage energy consumption properly because their production plans will be risky in the medium- and long-term. The results showed that uncertainty in economic policies has a direct positive and significant positive effect on energy intensity in the short and long term. On the other hand, the indirect effects of economic policy uncertainty through the rate of inflation, budget deficit and economic growth on the intensity of energy consumption are negative, and these negative effects are intensified despite the uncertainty in economic policies.Therefore, reducing the intensity of energy consumption is possible by controlling inflation, budget deficit and strengthening economic growth. Because the impact of these variables on energy intensity is greater than the effects of macroeconomic uncertainty on energy intensity.