A Time Series Analysis of the Aggregate Income-Energy Consumption Nexus: the Case of Italy

We empirically analyze the nexus between GDP and energy consumption in the 1970-2009 years for Italy, using a time-series approach. After a brief introduction, we pre-sent the discussion of the data. Stationarity tests reveal that both series are non-stationary, or I(1). Moreover, since both series show the presence of a structural break, a Gregory and Hansen cointegration test has been per-formed. The results evidence the presence of a long-run relationship. Causality tests re-veal that the “neutrality hypothesis” emerges, insomuch as the absence of a causal rela-tionship be-tween energy consumption and real GDP is discovered. The IRFs analysis evidences that a shock to the energy consumption affects GDP for one period, but dies out very quickly. While shocks to GDP create a smaller but significant response in the energy consumption, although it falls to zero in few periods. Finally, we calculate with an ECM that the long-run multiplier is 0.70. The energy consumption will increase to correct the disequilibrium, with 11% of the (remaining) deviation corrected in each sub-sequent time period. In addition, a one-unit increase in the GDP immediately produces a 1.07 unit increase in the energy consumption.