Electricity Consumption and Economic Growth: Analysis and Forecasts using VAR/VEC Approach for Greece with Capital Formation

This paper tests for the existence and direction of causality between electricity consumption and real gross domestic product for Greece. The study examines a trivariate system with capital formation for the period 1980-2010. Robust empirical results indicate that all variables are integrated of order one and cointegration analysis reports that cointegrating relationship exists between the variables. VAR/VEC approach suggests that all variables return to the long-run equilibrium whenever there is a deviation from the cointegrating relationship and that unidirectional causal links exists running from capital formation and electricity consumption to RGDP in the short-run implying that the economy of Greece is strongly energy dependent. Forecasts for the period 2011-2020 indicate increasing consumption of electricity and positive growth rates from 2013. Policy makers will need to liberalise the electricity sector and to turn the economy towards renewable and natural gas sources in order to reduce imports of oil and coal dependency. Keywords: Electricity consumption; Economic Growth; Capital Formation; Cointegration; Greece JEL Classifications: Q43; C32; O5