Does energy consumption stimulate economic growth? Evidence from panel data for EU members

The relationship between energy consumption and economic growth has received great attention over the past decade in the bourgeoing empirical literature as energy consumption is considered to be one of the most important driving forces of economic growth across the world. Four assumptions and policy implications were particularly debated in this empirical litterature: "the growth assumption" (energy consumption stimulates economic growth), "the conservation assumption" (economic growth drives energy consumption), "the neutrality assumption" (there is no causality between energy consumption and economic growth) and "the feedback assumption" (there is a bi-causality between energy consumption and economic growth). The paper aims to investigate whether energy consumption drives economic growth or whether economic growth drives energy consumption in the case of European Union (EU) countries. The analysis is performed over the 1990-2013 period and uses the dynamic panel estimation models, including the Pooled Mean Group (PMG) estimator (Pesaran and Smith, 1995; Pesaran, Shin and Smith, 1999). Compared to the traditional literature on dynamic panels, these techniques estimate a different slope parameter for each panel country and take into account the non-stationarity of variables when investigating the energy-income nexus. Findings reveal that there is a long-run and short-run causality from energy consumption to economic growth only during the pre-crisis period but, a long-run and short-run causality from economic growth to energy consumption for all the selected sub-periods. These outcomes show that energy consumption is a key input in the production function and that an energy saving policy and efficiency improvement may favorably influence economic growth across the world.