The Nexus between Energy Consumption Shocks and Economic Growth: Using BVAR Approach

Abstract

This paper examines the nexus between economic growth and energy consumption shock, over the period 1990-2020, in Iran. We employ a Bayesian vector autoregressive (BVAR) with new prior functions, which will give results more acceptable consequences than the classical methods to study these relationships. This study estimates the relationship between energy consumption shocks and economic growth within a multivariate BVAR framework by including gross capital formation, Labor and carbon dioxide emission. The multivariate impulse responses to shocks in all the variables are obtained. The results show that, there is a positive impact of energy consumption shocks on economic growth in Iran and this means that energy consumption is crucial for economic growth. Also, the responses of economic growth to one-unit shock of gross capital formation and labor force are positive and the responses of economic growth to the one-unit shock of carbon dioxide emission is are negative.