2. Model and methodology
2.1. Neo-classical production model
To investigate the relationship between energy use and output growth, we used the framework
proposed in (Ghali and El-Sakka 2004, and also used in Soytas and Sari, 2007, among others) based on the
conventional neo-classical one-sector aggregate production technology where capital, labor, and energy
are treated as separate inputs. That is:
Yt ¼ f Kt; Lt ð Þ ; Et ð1Þ
where Y is aggregate output or real GDP; K is the capital stock; L is the level of employment; E is total
energy consumption in aggregated level or coal consumption, oil consumption and electricity consumption
at disaggregated level, and the subscript t denotes the time period. Taking the differential of Eq. (1) and
dividing through by Yt we have:
d
Yt ¼ ad
Kt þ b
d
Lt þ c
d
Et ð2Þ
where a dot on the top of a variable means that the variable is now in a growth rate form. The constant
parameters a, b and c are the elasticities of output with respect to capital, labor and energy, respectively.
The relationship between output and capital, labor, and energy inputs described by the production function
in Eq. (1) suggests that their long-run movements may be related. Furthermore, if we allow for short-run
dynamics in factor-input behavior, the analysis above would also suggest that past changes in capital, labor,
and energy could contain useful information for predicting the future changes of output, Ceteris paribus.
These implications can be easily examined using tests for multivariate cointegration and Granger causality.
2.2. Test for cointegration and Granger causality
Following Granger (1988), and Engle and Granger (1987), we estimated a VEC model for the Granger
causality test for our problem at hand. The VEC representation is as follows: