The asymmetric effect of economic policy uncertainty on energy consumption

Abstract

Assuming that economic policy uncertainty (EPU) can significantly affect economic activities, the paper explored the nature of its effect on energy consumption in G7 countries (Canada, France, Germany, Italy, Japan, the UK, and the USA) over the period 1997–2019 using a panel nonlinear autoregressive distributed lag model. The presence of an asymmetric effect of EPU on energy consumption was tested by decomposing EPU into negative and positive changes and placing it in a multivariate setting. The results reveal that the asymmetric effect of EPU on energy consumption is limited to the short run. However, if energy policy fails to manage uncertainty, it could become significant in the long run. Energy consumption is statistically significantly affected by economic institutions and income in both the short and the long run. Higher real income per capita boosts energy consumption in the short run, but like energy technology innovation, it reduces energy consumption in the long run. In contrast, more economic freedom, which was used as a proxy for institutions, increases energy consumption regardless of the time frame. The results point to the energy policy challenges associated with energy consumption and sustainable energy practices.