The impact of biomass, geothermal and hydroelectric energy consumption on industrial production: A threshold cointegration model with regime shifts

This paper aims at estimating the impact of total renewable energy consumption and its components on industrial production. Paper launches the data of industrial production, total biomass energy consumption, hydroelectric energy consumption, geothermal energy consumption and total renewable energy consumption for US for the period January, 1974 - January, 2012. Paper, then, following the growth rate of the data, employs nonlinear cointegration vector and nonlinear vector error correction model (VECM) through regime shifts. In estimation algorithm, all coefficients, except cointegration vector, are allowed to shift from one regime to another. Finally paper reveals that (i) total biomass energy consumption and industrial production and (ii) geothermal energy consumption and industrial production are significantly cointegrated and, that, on the other hand, (iii) hydroelectric energy consumption and industrial production, (iv) total renewable energy consumption and industrial production do not follow cointegrating path, and (v) VECM’s second regimes need larger adjustments in order for industrial growth to reach its long run equilibriums with growths of biomass and geothermal consumption.