The Causal Relationship between Primary Energy Consumption and Economic Growth in Israel: A Multivariate Approach

The empirical relationship among energy and economic growth has been abundantly studied in the literature. In this paper, we provide a state-of-the-art review of the topic, and highlight the main methodological issues that previous studies have attempted to address so far. Since Israel is experiencing profound energy changes, we take this case as an illustration and investigate the causal link between primary energy consumption and economic growth. Capital and labour are included in the model with multivariate framework. A cointegrating relationship is found among the variables. Causality tests’ results display both short-run and long-run relationship between economic growth and primary energy consumption. Besides, a unidirectional causality running from economic growth to primary energy consumption is supported. Since the primary energy consumed in Israel is overwhelmingly oil, natural gas and coal, we support the economic growth-led-primary energy consumption hypothesis. In line with previous studies, our findings suggest that promoting low-carbon energy sources through fossil conservation policies may not significantly hinder economic growth.