The Energy-Growth Nexus in India and the United States

The nature of the relationship between energy and economic growth, the so called ”energy-growth nexus,” is still not fully understood. Many economists have found that greater energy consumption causes greater economic growth but not vice versa. However, others have found that the only causal relationship is growth causing energy or there is bi-directional causality where both cause each other [Omri 2015]. More insight is needed to solve this discrepancyMost investigations into this topic focus on testing for cointegration and Granger causality between economic output and energy consumption. Cointegration tests if there is a significant relationship, and Granger causality determines the direction ofthe relationship by testing whether the past values of one variable can be used to predict the present values of another. Usually energy consumption is either measured as a total of electric consumption plus fossil fuels consumption expressed in physical quantities (such as British thermal units), or else a specific component of energy consumption such as electricity, or renewable energy, is used. It important to control for other relevant factors of growth in the causality models. For that reason, it is common to include labor force and physical capital in energy-growth nexus models. In their 2017 paper, Fang and Chen took this further by including human capital. Furthermore, while most single country Energy-Growth nexus studies use country wide data to examine causality via time-series methods. In contrast, Fang Chen used provincial level panel data to examine causality with paneldata methods. Fang and Chen found that China as a whole exhibited a bi-directional relationship between energy consumption and economic growth, but that the results were much more varied in individual Chinese states. This paper will re-examine the relationship between energy and growth in theUnited States and electricity and growth in India by applying intra-country panel data methods and by incorporating human capital into the economic output production function