Download Examining the Asymmetric Behavior between Energy

Examining Asymmetric Behavior
between Energy Consumption and
Economic Growth in Taiwan
Jin-Li Hu
Cheng-Husn Lin
Institute of Business and Management
National Chiao Tung University
http://www.cc.nctu.edu.tw/~jinlihu
2009.4.8
1
Agenda
Introduction
Energy development in Taiwan
Methodology
Empirical results
Concluding remarks
2
Introduction (1/9)
 Since the early 1980s, energy demand on a national and
international basis has been extensively analyzed, initially
motivated by concerns about security due to energy
supply in view of the twin oil price shocks and later
because concerns about climate change.
 Due to the growing pressure exerted on governments to
mitigate carbon dioxide (CO2) emissions to slow down
the rate of climate change, many countries worry about
the negative impact on economic growth caused by the
restricted use of fossil fuels.
3
Introduction (2/9)
 Attention has recently been paid to obligations
under the Kyoto Protocol that came into force in
February 2005
 Many countries worry about the negative impact on economic
growth by the restricted use of fossil fuels.
 Developed countries have to reduce greenhouse gas emissions
by at least 5% below the 1990 level, while the United States
has agreed to reduce emissions from its 1990 levels by 7% in
the commitment period 2008-2012.
 Improving energy efficiency as one of the most cost-effective
ways to meet their commitments.
4
Introduction (3/9)
 Recently, to respond to the influence of the Framework
 Convention on Climate Change of the United Nations,
Taiwan’s government held the National Energy
Conference in 1998 and 2005 to decided upon appropriate
strategies that are compatible with economic development,
energy supply, and environmental protection (3E).
 Carbon dioxide emissions are expected to reduce to
levels of 38 million tons of oil equivalent (MTOE) in
2015 and to 78 MTOE in 2025, respectively
5
Introduction (4/9)
 Government authorities should constructively give an
impetus to the management of carbon dioxide emissions
in the energy sector.
 Energy investment plans: the measurement of greenhouse
emissions for energy sectors, the adoption of suitable
green technologies, and electricity supply should pay fees
in terms of the portion of non-renewable generated
electric power.
6
Introduction (5/9)
 The research issue of energy-output relationship in
energy field
 Granger Causality
 GDP→Energy: the policies for reducing energy
consumption may be implemented with little or no adverse
effects on economic growth, such as in a less energydependent economy
 Energy→GDP: the use of energy consumption may
adversely affect economic growth
 GDP↔Energy: energy consumption and economic growth
are jointly determined and affected at the same time
 GDPEnergy: the so-called ‘neutrality hypothesis’, means
that energy conservation policies do not affect economic
growth
7
Introduction (6/9)
 Cointegration Analysis
 Many recent studies explore the long-run equilibrium (or
cointegration) relationship between energy consumption
and economic growth with either a bivariate or
multivariate framework.
 Equilibrium theories involving non-stationary variables
require the existence of a combination of variables that
are stationary and cointegration does not require that the
long-run equilibrium relationship to be generated by
market forces or the behavioral rules or individuals.
 The cointegration tests include: Engle-Granger (1987),
Autoregressive distributed Lag (ARDL; Pesaran,1999),
Johansen (1990), etc.
8
Introduction (7/9)
 However, ……..
 Enders (1995) points out that nonlinear long-run
relationships possibly exist among a set of integrated
variables.
 Balke and Fomby (1997) argue that movement toward the
long-run equilibrium not need to occur in every period
relative to the conventional assumption-that is, a tendency
to move toward a long-run equilibrium is present every time
period.
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Introduction (8/9)
 Fortunately, some works may support our conjunction
 Altinay and Karagol (2004) reports that the conventional unit
root tests indicate the series contain a unit root, whereas the
endogenous unit root tests reveal that the series are trend
stationary with a structural break.
 Lee and Chang (2005) find that gas consumption seem to have
structural breaks in the 1960s for Taiwan. After considering the
structural breaks, the series is a stationary variable when
Taiwan adopts its expansionary export trade policy. (the
cointegration between energy consumption and GDP is
unstable, and some economic events may impact the stability)
 Lee and Chang (2007) document that there exists a nonlinear
relationship between energy consumption and economic
growth in Taiwan by employing the threshold regression (TAR)
in which the endogenous threshold values can be derived in
energy consumption.
10
Introduction (9/9)
 Research purpose
 The aim of this paper is to examine the long-run relationship
between energy consumption and economic growth for Taiwan
using a newly developed momentum threshold-autoregressive
(M-TAR) cointegration method by Enders and Siklos (2001),
who allow for asymmetric behavior.
 M-TAR adjustment can be particularly useful when policy makers
are viewed as attempting to smooth out any large changes in a series.
 Another purpose is to utilize the disaggregated energy
consumption at the sector level to detect whether each is
cointegrated with economic growth.
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Energy development in Taiwan (1/3)
 Energy-output nexus in Taiwan
 1980-1997: Taiwan’s economy enjoyed a remarkable annual
economic growth rate of 7.59% and an average annual energy
consumption growth of 5.84%, implying that domestic output
consumes a relative lower level of energy.
 1998-2002: the average annual economic growth was 3.63%, while
the average annual energy consumption growth still sustained at
5.58%, worsening energy efficiency.
 Some violent exogenous event shocks to the domestic economic
activity: the Asian financial crisis (1997-1999) and a recession in the
global business cycle in 2001.
 Energy over-consumption cannot effectively enhance economic
growth and may generate disequilibrium between energy
consumption and economic growth.
 2003-2006: energy consumption growth is 3.77% and economic
growth is 4.51%, the per-unit production still needs to consume a
near unit of energy.
12
Energy development in Taiwan (2/3)
100%
80%
The sum of the percentage of
energy consumption in
residential, transportation and
industrial sectors to total
energy consumption grows up
to 80% over past thirty years.
60%
40%
20%
0%
1954
1960
1966
1972
Industrial
1978
Transportation
1984
1990
Residential
1996
Others
2002
13
Energy development in Taiwan (3/3)
 2005 National Energy Conference
 Carbon dioxide emissions are expected to reduce to 38 million tons
of oil equivalent (MTOE) in 2015 and to 78 MTOE in 2025,
respectively.
 Taiwan’s government regulatory authority should establish a market
mechanism to promote the rationalization of energy prices, liberalize
the energy market, and consolidate the management of energy
efficiency.
 The structures of energy allocation percentage in 2025 are expected
to drop to be fuel 41% to 45%, oil 32% to 31%, natural gas 16% to
19%, nuclear energy to 4%, and renewable energy 5% to 7%.
 Energy investment plans
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The Method (1/6)
 Data sources
 The data for Taiwan used in this study consist of total final
energy consumption (EC), industrial sector energy consumption
(IND), transportation sector energy consumption (TRA),
residential sector energy consumption (RES), and GDP (Y).
 All original energy consumption data are measured as kiloliters
of oil equivalent (KLOE). The nominal gross domestic product
series in the national currency is transformed into real gross
domestic product in 2001 prices, using GDP deflators.
 The empirical data are calculated as the quarterly growth rate
and the sample period is from 1983:Q1 to 2006:Q4.
 The source of the data is compiled from the AREMOS
economic-statistic database.
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The Method (2/6)
 Threshold cointegration (Enders and Siklos, 2001)
 Enders and Siklos (2001) make an extension to the twostep symmetric testing strategy of Engle and Granger
(1987) to test for a long-run relationship between two
time series variables which take asymmetry into account.
 The resulting M-TAR testing procedure has shown good
power and size properties relative to the alternative
assumption of symmetric adjustment.
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The Method (3/6)
 First step
 Using OLS method to estimate the following base model
representing the long-run equilibrium relationship
Yt  0  1ECt  ut
(1)
where Yt is economic growth, ECt is the energy consumption
growth, and ut denotes the disturbance term that may be
serially correlated. The existence of the long-run equilibrium
relationship involves the stationarity of ut.
17
The Method (4/6)
 Second step
 To investigate the stationarity of ut, whether -2<ρ<0 has to
be tested in the second step procedure given by
ut  ut 1   t
(2)
where εt is the white-noise disturbance and the residuals
from (1) are used to estimate (2). Rejecting the null
hypothesis of no cointegration (i.e., accepting the alternative
hypothesis -2<ρ<0 ) implies that the residuals in (1) are
stationary with zero mean.
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The Method (5/6)
 Second step (continued)
 The standard cointegration framework assuming
symmetric adjustment toward equilibrium in (2) is
misspecified if the adjustment process is asymmetric.
Therefore, the residuals ( uˆt ) from (1) are then used to
estimate the following M-TAR model:
p
uˆt  M t 1uˆt 1  (1  M t )  2uˆt 1    i uˆt i   t
(3)
i 1
where ρ1 and ρ2 are the speed of adjustment coefficients
of uˆt , and  t ~ I .I .D (0,  2 ). The lagged values of uˆt are
supposed to yield uncorrelated residuals and can be
determined by the AIC model-selection criteria.
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The Method (6/6)
 How to search the specified threshold value
 The Heaviside indicator function is denoted as follows

1 if uˆt 1  
Mt  

0 if uˆt 1  
and  is the threshold value. The threshold parameter  , is endogenously
determined using Chan’s (1993) method to search for the consistent estimate
of the threshold. This method sorts the estimated residual series in ascending



order and is called u1  u2   uT , where T denotes the number of usable
observations. The largest and smallest 15% of the ui  values are excluded.
The estimated threshold yielding the lowest residual sum of squares is
deemed to be the appropriate estimate of the threshold over the remaining
70%.
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Empirical Results (1/4)
 Unit root tests
Levels
First differences
ADF
KPSS
ADF
KPSS
GDP
-0.915[8]
0.302[8]***
-3.280[7]*
0.095[6]
EC
-0.494[4]
0.162[6]**
-7.955[3]***
0.054[5]
IND
-2.361[1]
0.317[8]***
-14.859[0]***
0.083[12]
TRA
0.128[1]
0.306[8]***
-12.869[0]***
0.117[3]
RES
-0.399[4]
0.259[9]***
-8.985[3]***
0.041[6]
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Empirical Results (2/4)
 The cointegration and asymmetry tests

Total
Industrial
Transportation Residential
τ
ρ1
-0.00298
-0.02281
-0.00122
-0.201 (-2.87) -0.036 (-0.94) -0.084 (-1.71)
-0.516 (-2.79)
ρ2
-0.071 (-0.89) -0.491 (-3.38) -0.162 (-2.51)
-0.297 (-1.41)
Φμ
7.002**
9.397***
9.842***
1.117
ρ1=ρ2 (F-test)
4.703**
6.060***
4.926***
2.074
Lags
2
1
3
4
Q(4)
1.698 (0.79)
6.166 (0.19)
4.286 (0.37)
0.631 (0.96)
AIC
-6.497
-5.927
-6.570
-4.999
-0.00622
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Empirical Results (3/4)
Total

Industrial
Transportation
△GDP
△EC
△GDP
△IND
△GDP
△TRA
Intercept
0.006 (3.796)
0.007 (4.352)
0.007 (5.117)
0.007 (3.786)
0.008 (5.841)
0.007 (3.952)
λ1
-0.009 (-1.857)
0.161 (2.509)
-0.015 (-0.629)
0.005 (0.157)
-0.006 (-0.150)
-0.087 (-1.475)
λ2
-0.059 (-0.891)
-0.101 (-1.378)
-0.147 (-1.974)
0.249 (1.933)
-0.025 (-0.424)
0.152 (1.889)
λ1=λ2
0.313 [0.577]
7.009 [0.009]
1.978 [0.163]
3.469 [0.066]
0.066 [0.798]
5.862 [0.017]
λ1=λ2=0
0.414 [0.662]
3.988 [0.022]
1.406 [0.251]
1.870 [0.160]
0.100 [0.905]
2.936 [0.058]
α1=α2=0
2.365 [0.099]
0.728 [0.486]
1.146 [0.322]
1.072 [0.347]
1.998 [0.142]
0.520 [0.596]
β1=β2=0
7.414 [0.001]
5.762 [0.004]
5.550 [0.005]
4.032 [0.021]
1.462 [0.237]
1.053 [0.353]
λ1=α1=α2=0
1.601 [0.195]
2.700 [0.050]
0.932 [0.429]
0.736 [0.533]
1.421 [0.242]
0.900 [0.445]
λ2=α1=α2=0
2.541 [0.061]
0.870 [0.460]
1.839 [0.146]
2.489 [0.065]
1.453 [0.233]
1.641 [0.186]
λ1=β1=β2=0
5.055 [0.003]
7.704 [0.000]
3.863 [0.012]
2.763 [0.047]
1.091 [0.357]
1.237 [0.301]
λ2=β1=β2=0
5.721 [0.001]
4.086 [0.009]
4.102 [0.009]
6.852 [0.000]
1.171 [0.325]
2.555 [0.060]
No. Lags
2
2
2
2
2
2
Q(4)
0.109 (0.99)
2.190 (0.70)
0.158 (0.98)
0.607 (0.96)
0.142 (0.98)
3.908 (0.42)
23
Empirical Results (4/4)
 Detecting the constancy of the cointegration space:
CUSUMSQ tests for basis model
1.2
1.2
CUSUM of Squares

5% Signific anc e
CUSUM of Squares
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
-0.2
5% Signific anc e
-0.2
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
1988
Energy sector: Total
1990
1992
1994 1996 1998 2000
Energy sector: Industrial
2002
2004
2006
1.2
CUSUM of Squares
5% Signific anc e
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Energy sector: Transportation
24
Concluding Remarks (1/3)
 This paper considers the possibility of a nonlinear effect
between energy consumption and economic growth due to the
recent observations that energy consumption is higher than
economic growth in Taiwan, worsening energy efficiency. We
suspect that the relationship between energy consumption and
economic growth has a disequilibrium condition.
 Allowing for an asymmetric adjusting behavior of energy
consumption and economic growth sheds new light on the
explanation of the characteristics of the energy-growth nexus.
 The threshold cointegration tests confirm that there is a
nonlinear cointegration relationship between energy
consumption and economic growth in Taiwan.
25
Concluding Remarks (2/3)
 The estimated vector error-correction models provide strong
evidence that the deviations persistently adjust toward longrun equilibrium in a relative energy-efficient regime for the
aggregate-level and in a relative energy-inefficient regime for
the sector-level.
 The short-run weak exogeneity Granger causality tests support
that there is Granger causality from energy to economic
growth in the cases of the aggregate and industrial sector.
 Policy-makers should take into account the asymmetric
adjustment behavior of the energy-growth nexus when
building estimation and prediction models of economic growth
for Taiwan in the future.
26
Concluding Remarks (3/3)
 Policy Implications
 Implementing the energy demand side management (EDSM).
 Propagating the importance of energy-savings through
education, public media, and social public.
 Legislative institutions and government sectors also should
animate the liberalization of the energy market and consolidate
the energy price mechanism to establish an efficient energy
market.
 Government authorities should make efforts on the
developments of renewable energy such as wind power, solar
energy, and biomass fuels.
 Improving energy efficiency may alleviate the problems of
greenhouse gas emissions as well as ‘decoupling’ between
energy consumption and economic growth.
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~ The End ~
Any Questions?
Pursuing Energy Sustainable Development
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