Testing causal relationships between energy consumption, real income and prices: evidence from Turkey

In this paper, we examine the causal relationships between the changes in energy consumption, real income growth and domestic inflation within the conditions of the Turkish economy. Based on a contemporaneous multivariate co-integrating estimation methodology, our estimation results indicate that a distinction between various categories of energy consumption needs to be made in order for the causality issues of interest to be elucidated. We find as a vital point to be emphasized that domestic inflationary framework is highly endogenous to all the model constructions and thus subject to the changes in especially energy consumption. It is also significant that there seems to be a long-run causal relationship between the variables when the levels of industrial consumption are used as the relevant energy consumption data since they have highly endogenous characteristics against each other within the causality analysis. We conclude that energy policies ex-ante designed have the power of affecting domestic inflation significantly. We also suggest that, for the case of industrial energy consumption data, energy conservation policies may lead to harmful results for the real income growth process though the latter issue is not the relevant case for the residental and commercial energy consumption and total energy consumption data.