Testing for VECM Granger Causality and Cointegration Between Economic Growth and Renewable Energy: Evidence from MENA Net Energy Importing Countries

Badry Hechmy

Badry Hechmy Department of Quantitative Methods, University of Tunis El Manar, Tunisia

Keywords: Renewable Energy, Economic Growth, Cointegration Test, Causality Test, VECM, MENA-NEIC

Abstract

This paper employs several techniques to study the relationship between renewable energy consumption and economic growth in Net Energy Importing Countries in the Middle East and North Africa (MENA-NEICs) during the period from 2001 to 2015. Panel cointegration test shows that there is a long-term cointegration relationship between those variables. However, the Granger causality test in VECM shows that this relationship is bidirectional in the short and long term. Thus, MENA-NEICs must encourage the deployment of renewable energies to the detriment of fossil fuels. To this end, an investment incentive is suggested in this sector, which will be medium and long-term market-based. In the short term, a transitional stage of a mixed and dynamic approach consisting of a program of partial subsidies for renewable energy production and partial adjustment of fossil fuel prices that is progressively moving towards a final stage where subsidies to energy will be completely removed is suggested. In this way, these countries can make the trade-off between fiscal sustainability and political stability.

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