Are fluctuations in electricity consumption per capita transitory? evidence from developed and developing economies

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1 MPRA Munich Personal RePEc Archive Are flucuaions in elecriciy consumpion per capia ransiory? evidence from developed and developing economies Muhammad Shahbaz and Aviral Tiwari and Ozurk Ilhan and Farooq Abdul COMSATS Insiude of Informaion Technology, Lahore, Pakisan, ICFAI Universiy Tripura, Cag Universiy, COMSATS Insiude of Informaion Technology, Lahore, Pakisan 10. June 2012 Online a hp://mpra.ub.uni-muenchen.de/39443/ MPRA Paper No , posed 14. June :48 UTC

2 Are Flucuaions in Elecriciy Consumpion per Capia Transiory? Evidence from Developed and Developing Economies Muhammad Shahbaz COMSATS Insiue of Informaion Technology, M. A Jinnah Campus, Defence Road, Off Raiwind Road, Lahore, Pakisan, shahbazmohd@live.com Aviral Kumar Tiwari Faculy of Managemen, ICFAI Universiy Tripura, Kamalgha, Sadar, Wes Tripura, Pin Id: aviral.eco@gmail.com Ilhan Ozurk Faculy of Economics and Adminisraive Sciences, Cag Universiy, 33800, Mersin, Turkey. ilhanozurk@cag.edu.r Tel & Fax: Abdul Farooq COMSATS Insiue of Informaion Technology, M. A Jinnah Campus, Defence Road, Off Raiwind Road, Lahore, Pakisan, afarooq@ciilahore.edu.pk Absrac This paper invesigaes he uni roo properies of elecriciy consumpion per capia for he 67 developed and developing counries for period. To examine he saionary properies of elecriciy consumpion per capia, we have adoped Lee and Srazicich (2003, 2004) es of uni roo ha allows us o es for a mos wo endogenous breaks and uses he Lagrange Muliplier (LM) es saisics. Resuls show ha 65 counry series rejec he uni roo null hypohesis excep for 2 counry series. Thus, our empirical findings provide significan evidence ha elecriciy consumpion per capia is saionary in almos all counries considered in he sudy. The saionariy of elecriciy consumpion per capia indicaes ha i should be possible for he series o forecas fuure movemens in he energy consumpion based on he pas behaviors of he series. Keywords: Elecriciy, Transiory, Permanen 1

3 1. Inroducion Energy lieraure seems o provide he empirical evidence finding saionariy properies of energy consumpion. For insance, Lee and Chang [1], Al-Irani [2], Chen and Lee [3], Narayan and Smyh [4], Hsu e al. [5], Lean and Smyh [6], Mishra e al. [7], Apergis e al. [8, 9], Narayan e al. [10], Ozurk and Aslan [11], Hasanov and Erdinc [12], Aslan [13], Aslan and Kum [14] and Kula e al. [15] applied numerous approaches o examine saionariy properies of energy consumpion. The empirical invesigaion of saionariy properies of he energy consumpion leads us o check wheher shocks o energy consumpion have unending or emporary effecs. If he series of energy consumpion is saionary a level hen flucuaions in energy consumpion will have emporary effecs wih he passage of ime and such policies have ransiory impac. These effecs are removed once he series (i.e. energy consumpion) reurn o heir long run pah. The pas behavior of energy consumpion can be used o formulae forecas once series is found o be saionary. On conrary, if energy consumpion conains uni roo problem (i.e. non-saionary) hen flucuaions in energy consumpion seems o have permanen effecs (Chen and Lee, [3]; Mishra e al., [7]). The sudies repored in Table-1 applied various echniques o find saionariy properies of energy variables providing conflicing resuls. Mos of hese sudies used uni roo ess which do no have informaion abou srucural break poin semming in he energy series excep Ozurk and Aslan [11] and Kalu e al. [15]. These ess failed o capure he effecs of coninuous economic growh, implemenaion of naional policies, crisis, wars ec, alhough auhors employed a variey of economeric approaches. Thus, when srucural breaks are aken ino accoun, mos of he sudies show ha elecriciy consumpion per capia is saionary. Finally, by aking srucural breaks in he elecriciy consumpion series will 2

4 significanly increase he power of he uni roo ess and more significan resuls may be obained from he analyses. Table-1: Survey of lieraure for saionariy properies Auhors Time period Uni Roo Tes Conclusion Lee and Chang [1] Zivo and Andrews [16] Uni roo exiss srucural break es Al-Irani [2] Univariae and IPS panel ess Uni roo exiss Narayan and Smyh [4] Univariae and IPS panel ess Saionariy is found Chen and Lee [3] Carrion-Silvesre muliple Tes Saionariy is found Narayan e al. [17] LM srucural break es Saionariy is found Hsu e al. [5] Panel seemingly unrelaed Uni roo exiss regressions ADF Mishra e al. [7] LLC, IPS and Maddalae Wu Miscellaneous resuls (MW) panel ess and CIPS es Lean and Smyh [6] Long memory es Miscellaneous resuls Narayan e al. [10] Lee and Srazicich (2003) wo Saionariy is found Srucural break Tes Apergis e al. [8] LM srucural break es Saionariy is found Apergis e al. [9] LM srucural break es Saionariy is found Ozurk and Aslan [11] Lee and Srazicich [18]) wo Saionariy is found Srucural break Tes Hasanov and Erdinc [12] Non-linear Tes by Kapeanios Miscellaneous resuls e al. [19] Aslan [11] LM srucural break es Miscellaneous resuls Aslan and Kum [14] LM srucural break es Saionariy is found 3

5 Kalu e al. [15] LM srucural break es Saionariy is found The aim of his paper is o examine he uni roo properies of elecriciy consumpion per capia for he 67 developed and developing counries for period. The paper is organized as follows: Secion 2 describes mehodology and daa. Secion 3 presens resuls and Secion 4 concludes he paper. 2. Mehodology and Daa Tradiional uni roo ess like Augmened Dickey Fuller (ADF) [20], Phillips-Perron (PP) [21] and Perron (1990) are found o give misleading resuls (i.e., biased owards he nonrejecion of null hypohesis when srucural breaks are presen in he daa series). Therefore, in he presen sudy we have adoped Lee and Srazicich [18, 23] es of uni roo ha allows us o es for a mos wo endogenous break and uses he Lagrange Muliplier (LM) es saisics. Le us consider he following daa generaing process (DGP): y Z e, e e 1. (1) where Z is a vecor of exogenous variables, is a vecor of parameers and is a whie 2 noise process, such ha ~ NIID (0, ). Firs we will consider he case when break here is evidence of one srucural break. The Crash model ha allows shif in level only is described by Z 1,, D ]', and he break model ha allows for changes in boh level and rend is [ described as Z [ 1,, D DT ]', where D and DT are wo dummies defined as: D 1,if T 1 = 0, oherwise and DT T if T 1 B B, B = 0, oherwise where T B is he ime period of he break dae. 4

6 Nex, le us consider he framework ha allows for wo srucural breaks. The crash model ha considers wo shifs in level only is described by Z 1,, D, D ]', and he break model [ 1 2 ha allows for wo changes in boh level and rend is described as Z [ 1,, D1 DT1 D2 DT2 ]', where D j and above, viz., DT j for j = 1, 2 are appropriae dummies defined as D j 1,if T 1 = 0, oherwise and DT T if T 1 = 0, oherwise where T Bj is he j h break dae. Bj j Bj, Bj The main advanage of (Lee and Srazicich, [18, 23]) approach o uni roo es is ha i allows for breaks under he null (β = 1) and alernaive (β < 1) in he DGP given in equaion (1). This mehod uses he following regression o obain he LM uni roo es saisics. y ' Z ~ S k ~ i S 1 j i 1 u...(2) where ~ S ~ ~ ~ y Z, 2,..., T; denoes he regression coefficien of y on Z and ~ ~ y Z1, y1 and 1 Z being firs observaions of y and Z respecively. The lagged erm ~ S j are included o correc for likely serial correlaion in errors. Using he above equaion, he null hypohesis of uni roo es ( 0) is esed by he LM -saisics. The locaion of he srucural break or srucural breaks is deermined by selecing all possible breaks for he minimum -saisic as follows: ln f ~ ( ) ln ~ i f ( ), where T B / T 5

7 The search is carried ou over he rimming region (0.15T, 0.85T), where T is sample size and T B denoes dae of srucural break. We deermined he breaks where he endogenous wobreak LM -es saisic is a a minimum. The criical values are abulaed in Lee and Srazicich [18, 23] for he wo-break and one-break cases respecively. The daa on elecriciy consumpion per capia (KWH) has been obained from World Bank s World Developmen Indicaors (WDI-CD, 2010). We have used daa of 67 developed and developing counries for period (see Table 2 for he counries used in his sudy). These counries are seleced according o daa availabiliy. 3. Empirical Resuls We sar our empirical exercise by examining saionariy properies of elecriciy consumpion per capia applying univariae LM uni roo es wih wo srucural breaks of 67 developed and developing economies of he globe. We decide o use maximum number of lagged augmened erms ha is k = 12. As such, he procedure looks for he significance of he las augmened erm. We hen use he 10% asympoic normal value of on he - saisic of he las firs differenced lagged erm. Afer deermining he opimal k a each combinaion of wo break poins, we deermine he srucural breaks where he endogenous wo breaks LM -es saisic is a a minimum. We examine each possible combinaion of wo break poins over he ime inerval of (0.15T, 0.85T) while eliminaing he endpoins. Here, T is he sample of size. We begin wih he LM uni roo -saisic wih wo breaks and examine he significance of he dummy coefficiens on he basis of he convenional -saisics. If less han wo breaks are significan a 10%, we apply he minimum LM uni roo -saisic wih one break proposed by Lee and Srazicich [23]. The LM uni roo es resuls for per capia elecriciy consumpion series are summarized in Table-2. 6

8 Table-2: LM uni roo es wih wo srucural breaks No. Counries T B1 T B2 T. saisics K 1 Algeria * 12 2 Argenina * 5 3 Ausralia Ausria * 12 5 Belgium * 12 6 Benin * 0 7 Bolivia * 7 8 Brazil * 12 9 Cameroon * Canada * Colombia * 4 12 Congo Dem. Rep * Congo Rep * Sweden * Cosa Rica * Co devoir * 0 17 Denmark * Dominican Rep * Ecuador ** Egyp * El-Salvador * Finland * 7 23 France * Gabon * 11 7

9 25 Ghana * 8 26 Greece ** 1 27 Guaemala * Honduras * 3 29 Iceland * 4 30 India * 7 31 Indonesia * 1 32 Iran * Ireland * Israel * 2 35 Ialy * 6 36 Japan * 8 37 Kenya * Korea Dem. Rep * 1 39 Malaysia * 7 40 Mexico * Morocco * 0 42 Nepal * The Neherlands * New Zealand * 0 45 Nicaragua * Nigeria * 5 47 Norway * Oman * Pakisan * Paraguay * 7 8

10 51 Peru * 0 52 Philippines * Serbia Senegal * Souh Africa * Spain * Sudan * 6 58 Thailand * Togo * 8 60 Trinidad and Tobago ** 8 61 Tunisia ** 9 62 Turkey * 6 63 Unied Kingdom * Uruguay * 0 65 Unied Saes * Venezuela * 6 67 Zambia * 4 Noe: This able presens Resuls for univariae LM uni roo es wih wo srucural breaks in inercep/consan and rend boh. T B1 and T B2 are he daes of he srucural breaks; k is he lag lengh ha is he opimal number of lagged firs differenced erms included in he uni roo es o correc for serial correlaion. The 1%, 5% and 10% criical values for he minimum LM es wih one break are 4.239, and 3.211, respecively. The 1%, 5% and 10% criical values for he minimum LM es wih wo breaks are 4.545, and 3.504, respecively. *, ** and *** denoe saisical significance a he 10%, 5% and 1% levels, respecively. 9

11 The LM uni roo analysis summarized in Table-2 provides suppor o accep he saionariy hypohesis of elecriciy consumpion per capia series for 65 of seleced 67 developed and developing counries. The resuls confirm ha flucuaions in elecriciy consumpion have emporary effecs in 65 counries. Kalu e al. [15] conduced a sudy using a daa of OECD counries and concluded ha in case of Finland and Spain shocks o elecriciy consumpion per capia are permanen. In he presen sudy we found ha shocks o elecriciy consumpion per capia are o be permanen for Ausralia and Serbia. Furher, our findings regarding Finland and Spain are no consisen wih Kalu e al. [15] because our analysis reveals ha shocks o elecriciy consumpion per capia have permanen effecs in case of Finland and Spain. The reason migh be he span of he daa used for analysis where Kalu e al. [15] uilized daa for he period and his sudy used daa covering period An examinaion of he break poins in Table-2 reveals some clusering of he break daes. I is apparen ha firs srucural breaks in mos of he series had occurred around he crises i.e., 1986, 1987 and This preponderance of break poins may reflec recessions during his period which leads o large shifs in he economic aciviy. 4. Conclusion and Fuure Research The saionary properies of per capia elecriciy consumpion have been analyzed in his sudy for 67 developed and developing counries by using (ime series daa) annual daa over LM uni roo es has been applied ha endogenously deermines srucural breaks in level and rend. Empirical resuls of he uni roo es reveal ha 65 counry series rejec he uni roo null hypohesis a he 1% and 5% significance levels, and accep only in 2 counry series (in Ausralia and Serbia). Hence, on he basis of empirical evidences invesigaed in his paper, we can say ha per capia elecriciy consumpion is saionary in almos all he counries. Thus, if he per capia elecriciy consumpion is mean (or rend) 10

12 revering, hen i follows ha he series will reurn o is mean value (or rend pah) and i migh be possible o forecas fuure movemens in he per capia elecriciy consumpion based on pas behaviors of he series (Narayan and Smyh, [4]). For he policy makers, i is no necessary o pay aenion o elecriciy consumpion series. For he fuure sudies relaed wih elecriciy consumpion, srucural breaks should be aken ino accoun o obain more significan resuls. Fuure research should consider secoral daa level such as indusrial elecriciy and/or residenial elecriciy raher han aggregae daa. 11

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