The empirical investigation of the dynamic causal relationship between electricity consumption and economic growth based on modern econometric techniques involves the following three steps. At the first step whether each panel variable contains a unit root is examined. If the variables contain a unit root, the second step is to test whether there is a long run-cointegration relationship between the panel variables. If a long-run relationship between the variables is found, the final step is to estimate panel vector error correction model in order to infer the Granger causal relationship between the variables. Finally using the GMM technique the long-run and short-run elasticities of economic growth with respect to electricity consumption are estimated for five different panels.

Panel Unit Root Tests

Since none of the panel unit root tests is free from some statistical shortcomings in terms of size and power properties, so it is better for us to perform several unit root tests to infer an overwhelming evidence to determine the order of integration of the variables. In this paper three panel unit root tests: Im, Peasaran and Shin (IPS, 2003), Maddala and Wu, and Choi tests are applied. The IPS and MW tests are based on the assumption of cross-sectional independence. This assumption is likely to be violated for the income variable. It is found by Banerjee, Cockerill and Russell that these tests have poor size properties and have a tendency to over-reject the null hypothesis of unit root if the assumption of cross-section independence is not satisfied. Choi is derived another test statistic to solve this problem. so

Both ai and p in equation and are allowed to vary across countries. The null hypothesis to be tested is that each series in the panel contains a unit root, i. e.

There are two stages for constructing the t-bar statistic which is proposed by Im, Pesaran and Shin. At the first stage the average value of the individual ADF t-statistic for each of the countries in the sample is calculated which is given by— 1 n tnT 1 tiT (pi) n i=1 i where t (p ) is the calculated ADF test statistic for country i of the panel (i = 1, 2,……,n). The second step is to calculate the standardized t-bar statistic which is given by; ^ It – I E(t1Tpi Z- = L. =1 J ~ N nT in-1 var(tITpi pi=1 where n is the size of the panel, which indicates the no. of countries, E(tiT(pi)) and var(tiT(pj)) are provided by IPS for various values of T and p. However, Im, et al. suggested that in the presence of cross-sectional dependence, the data can be adjusted by demeaning and that the standardized demeaned t-bar statistic converges to the standard normal in the limit.

Maddala and Wu proposed a Fisher-type test which combines the p-values from unit root tests for each cross-section i. The test is non-parametric and has a chi-square distribution with 2n degrees of freedom, where n is the number of countries in the panel. The test statistic is given. The Maddala and Wu test has the advantage over the Im, et al. test that it does not depend on different lag lengths in the individual ADF regressions. Maddala and Wu performed Monte Carlo simulations showing that their test is superior to that proposed by Im, et al.. In addition Choi derived another test statistic which is given.

**Table-2 IPS, MW , and Choi panel unit root tests results for five panels**

IPS Test | Prob. | MW Test | Prob. | Choi Test | Prob. | |

[High Income Panel; Constant and Trend Terms are Included in the Model [Level Form] | ||||||

lnPGDP | -1.4741 | 0.0712 | 46.8343 | 0.8927 | 1.3456 | 0.9108 |

lnEC | 0.74169 | 0.7709 | 67.71 52 | 0.2307 | 1.3273 | 0.9078 |

Model w | ith Only Cons | tant Term [ Fir | ■st Difference | d Form] | ||

AlnPGDP | -18.5510* | 0.0000 | 447.422* | 0.0000 | -17.099* | 0.0000 |

AlnEC | -15.1447* | 0.0000 | 365.974* | 0.0000 | – 1 4.7413* | 0.0000 |

Upper Middle Income Panel; Constant and Trend Terms are Included in the Model [Level Form] | ||||||

lnPGDP | 0.18274 | 0. 5729 | 26.9947 | 0.9422 | 1.36183 | 0.9134 |

lnEC | -1.64503 | 0.0500 | 43.4734 | 0.3257 | -0.7331 | 0.2318 |

Model with Only Constant Term [ First Differenced Form] | ||||||

AlnPGDP | -19.3034* | 0.0000 | 390.064* | 0.0000 | -16.5037* | 0.0000 |

AlnEC | -13.8171* | 0.0000 | 291.839* | 0.0000 | -13.5598* | 0.0000 |

Lower Middle Income Panel; Constant and Trend Terms are Included in the Model [Level Form] | ||||||

lnPGDP | 2.1013 | 0. 9822 | 16.8526 | 0.9995 | 3.54398 | 0.9998 |

lnEC | -2.4278* | 0.0076 | 48.5668 | 0.1660 | -1.9675* | 0.0246 |

Model with Only Constant Term [ First Differenced Form] | ||||||

AlnPGDP | -18.7508* | 0.0000 | 397.672* | 0.0000 | -16.6208* | 0.0000 |

AlnEC | -19.3710* | 0.0000 | 419.841* | 0.0000 | -16.759* | 0.0000 |

Low Income Panel; Constant and Trend Terms are Included in the Model [Level Form] | ||||||

lnPGDP | 1.5828 | 0. 9433 | 8.9726 | 0.7053 | 2.4071 | 0.9920 |

lnEC | -3.5461* | 0.0002 | 32.5079* | 0.0012 | -3.3349* | 0.0004 |

Model with Only Constant Term [ First Differenced Form] | ||||||

AlnPGDP | -10.4517* | 0.0000 | 120.762* | 0.0000 | -8.6467* | 0.0000 |

AlnEC | -12.6833* | 0.0000 | 146.074* | 0.0000 | -10.5931* | 0.0000 |

Global Panel; Constant and Trend Terms are Included in the Model [Level Form] | ||||||

lnPGDP | 0.0592 | 0. 5236 | 99.6542 | 0.9997 | 4.0383 | 1.000 |

lnEC | -2.6339* | 0.0042 | 192.262* | 0.0 1 50 | -1.4885 | 0.0683 |

Model with Only Constant Term [ First Differenced Form] | ||||||

AlnPGDP | -34.1038* | 0.0000 | 1401.61* | 0.0000 | -31.1291* | 0.0000 |

AlnEC | -30.1175* | 0.0000 | 1265.29* | 0.0000 | -28.2836* | 0.0000 |

**Table-3 Kao Cointegration Test Results for Five Panels**

Different Panels | Kao cointegration test | Probability |

High income panel | -7.1061* | 0.0000 |

Upper middle income panel | -4.1765 * | 0.0000 |

Lower middle income panel | -0.4343 | 0.3320 |

Low income panel | 0.1025 | 0.4592 |

Global panel | -5.9069* | 0.0000 |

**Table -4 Results of the Johansen based Panel Conintegration Test for Five Panels**

Number of Coint. Eqn. | Model 1 Trace Tes | t Prob. | Max-Eigen Value Test | Prob. | Model 2 Trace Test | Prob. | Max-Eigen Value Test | Prob. |

High Income Panel | ||||||||

None | 298.3* | 0.0000 | 289.4* | 0.0000 | 252.0* | 0.0000 | 222.3* | 0.0000 |

At Most 1 | 93.67* | 0.0035 | 93.67* | 0.0035 | 92.65* | 0.0044 | 92.65* | 0.0044 |

Upper Middle Income Panel | ||||||||

None | 146.0* | 0.0000 | 140.4* | 0.0000 | 143.8* | 0.0000 | 119.6* | 0.0000 |

At Most 1 | 60.37* | 0.0203 | 60.37* | 0.0000 | 63.79* | 0.0098 | 63.79* | 0.0098 |

Lower Middle Income Panel | ||||||||

None | 108.8* | 0.0000 | 112.3* | 0.0000 | 104.3* | 0.0000 | 103.1* | 0.0000 |

At Most 1 | 39.67 | 0.4849 | 39.67 | 0.4849 | 36.03 | 0.6377 | 39.03 | 0.6377 |

Low Income Panel | ||||||||

None | 47.61* | 0.0000 | 66.69* | 0.0000 | 54.31* | 0.0000 | 42.09* | 0.0000 |

At Most 1 | 16.42 | 0.1730 | 16.42 | 0.1730 | 24.60** | 0.0168 | 24.60** | 0.0168 |

Global Panel | ||||||||

None | 606.60* | 0.0000 | 588.5* | 0.0000 | 554.4* | 0.0000 | 487.0* | 0.0000 |

At Most 1 | 210.1* | 0.0013 | 210.1* | 0.0013 | 217.3* | 0.0004 | 217.3* | |

0.0004 |

**Table-5 Panel Granger F-test Results**

Dependent Variables | AlnEC | AlnPGDP | ECM | |

High Income Panel | [ VEC Model] | |||

AlnPGDP | 6.4359* (0.0000) | -2.80476* | (0.0051) | |

AlnEC | 31.6363* (0.0000) | 1.87976** | (0.0603) | |

Upper Middle Income Panel [VEC Model] | ||||

AlnPGDP | 1.9366** (0.0859) | -4.94594* | (0.0000) | |

AlnEC | 6.0683* (0.0000) | 2.87282* | (0.0042) | |

Global Panel [VEC Model] | ||||

AlnPGDP | 2.4059 * (0.0000) | -2.54997* | (0.0108) | |

AlnEC | 9.5215*(0.0000) | 6.19110* | (0.0000) | |

Lower Middle Income Panel [VAR Model] | ||||

AlnPGDP | 0.3695 (0.775019) | |||

AlnPGDP | 0.6602 (0.5175) | |||

lnEC | 0.7740 (0.4621) |

**Table-6 Panel Long-run and Short-run Elasticities**

Different Panels | Long-run Elasticity [ lnPGDP is the Dependent variable] | |||||

lnEC | AlnEC | ECM | ||||

Coefficient | t-Test | Coefficient | t-test | Coefficient t-Test | ||

High income panel | 0.5958* | 12.1476 | 0.1429* | 3.8152 | -0.0072 | -1.5674 |

Upper middle income | 0.6027* | 7.9218 | 0.2122* | 5.5597 | -0.0211* | -6.3097 |

Global panel | 0.8125* | 48.9068 | 0.1336* | 7.2043 | 0.0009 | 0.4544 |

Lower middle income | 0.2871* | 8.8280 | 0.1288* | 5.0831 | ||

Low income panel | 0.2145* | 17.3557 | 0.00278* | 4.4163 |