Are Fluctuations in Gas Consumption Per Capita Transitory? Evidence from LM Unit Root Test with Two Structural Breaks

Transcription

1 MPRA Munich Personal RePEc Archive Are Flucuaions in Gas Consumpion Per Capia Transiory? Evidence from LM Uni Roo Tes wih Two Srucural Breaks Muhammad Shahbaz and Sakiru Adebola Solarin and Hrushikesh Mallick COMSATS Insiue of Informaion Technology, Lahore, Pakisan, Mulimedia Universiy Malaysia, Melaka, Malaysia, Cenre for Developmen Sudies 10. Ocober 2015 Online a hps://mpra.ub.uni-muenchen.de/67227/ MPRA Paper No , posed 14. Ocober :38 UTC

2 Are Flucuaions in Gas Consumpion Per Capia Transiory? Evidence from LM Uni Roo Tes wih Two Srucural Breaks Muhammad Shahbaz Deparmen of Managemen Sciences, COMSATS Insiue of Informaion Technology, Lahore, Pakisan. Cell: , Fax: Sakiru Adebola Solarin Room 5012, Faculy of Business, Mulimedia Universiy Malaysia, Melaka, Malaysia Hrushikesh Mallick Cenre for Developmen Sudies (CDS), Prasanh Nagar, Ulloor, Trivandrum , Kerala, India Absrac: Wih a view o deermine he effeciveness of he policies aimed a boosing he naural gas consumpion, his paper examines he uni roo properies of naural gas in 44 counries, for he period 1965 o Applying he LM uni roo ess, which allow for a maximum of wo srucural breaks, we are able o rejec he null hypohesis of uni roo in he naural gas consumpion series of 57% of he counries, under sudy. The implicaion of hese resuls is ha shocks o naural gas consumpion in several counries will produce ransiory effecs. A key consequence of his finding is ha iniiaives designed o have permanen posiive effecs on naural gas, such as consrucion of large naural gas pipeline nework, are o be effecive in increasing he share of naural gas consumpion in only 43% of he oal sample. Keywords: Gas Consumpion, Saionary, Srucural Breaks I. Inroducion Naural gas is a major imporan source of non-renewable energy and is seen as an alernaive o reducing he dependence on oil a a ime when oil reserves are drasically depleing around he world economy. Besides, naural gas is seen o have clear meri as a cleaner alernaive o oher fossil fuels and as a viable means of energy for counries o mee he energy demands while achieving reducions in he emissions of carbon dioxide (Golpe e al., 2012). The lieraure on energy demand mosly seems o provide he empirical evidence in suppor of he saionariy properies of energy consumpion. The early sudies in his lieraure esed for a uni roo in aggregae energy consumpion. For insance, Lee and Chang (2005), Al-Irani (2006), Chen and Lee (2007), Narayan and Smyh (2007), Hsu e al. (2008), Lean and Smyh (2009), Mishra e al. (2009), Apergis e al. (2010a, b), Narayan e al. (2010), Ozurk and Aslan (2011), Hasanov and Telaar (2011), Aslan (2011), Aslan and Kum (2011), Kula e al. (2012), Shahbaz e al. (2013,

3 2014) and Lean and Smyh, (2014a, b) applied a varieies of uni roo esing procedures o examine he saionariy properies of energy consumpion. There are sudies ha have specifically focussed on he uni roo properies of disaggregaed energy consumpion, especially on naural gas consumpion. Many of hese sudies have also found non-saionariy in naural gas consumpion. For insance, Lean and Smyh (2014a) employed he Lee and Srazicich (2003) es on annual naural gas daa for Malaysia and concluded ha naural gas consumpion conained a uni roo. Aslan (2011) applied he Lee and Srazicich (2003) es and he Kapeanios e al. (2003) non-linear uni roo es o annual naural gas daa for 50 saes in U.S. The resuls provided evidence for non-saionary for majoriy of he saes. Gil-Alana e al. (2010) used fracional inegraion ess on naural gas consumpion by he power secor in U.S and i yielded highly persisen resuls. Using a non-linear unobserved componens model, Golpe e al. (2012) found evidence of hyseresis in naural gas consumpion in he U.S. There is also evidence for saionariy of naural gas consumpion. Apergis e al. (2010b) used he panel uni roo ess wih srucural breaks on naural gas consumpion in 50 saes of U.S and found naural gas consumpion o be panel saionary. In sum, here are mixed findings in he naural gas consumpion sudies, alhough several papers observed a nonsaionariy wih respec o naural gas consumpion. The mixed findings of uni roos from he previous empirical invesigaions moivae us o check wheher he shocks o naural gas consumpion have emporary or persisen effecs. The issue of wheher gas consumpion per capia conains a uni roo is imporan for several reasons. If he gas consumpion per capia is saionary, shocks will be ransiory and he per capia gas consumpion would reurn o is long-run level. If gas consumpion follows saionary process hen he long-run energy policies would no be effecive which may raher indicae he inelasiciy in is consumpion demand. Naural gas consumpion would end o reurn o is original pah following he shocks in he energy markes. On he oher hand, if i is found o be non-saionary, shocks will have permanen effecs and i would diverge from is long run level. Furhermore, o he exen ha per capia naural gas consumpion is closely linked wih oher real secors of he economy and he shocks o i would no only have permanen effecs on iself, bu also he oher key macroeconomic aggregaes such as oupu, invesmen and employmen are mos likely o inheri similar persisence in heir movemens hrough he ransmission channels. The persisence would have also imporan implicaion for forecasing and modelling he energy demand. If i is saionary, his implies ha i is possible o forecas he fuure per capia gas consumpion requiremens for economies, bu he same is no possible o forecas, if i conains a uni roo. Wih he excepion of Aslan (2011), Apergis e al. (2010b) and Golpe e al. (2012), ha have all focussed on he U.S. economy, he sudies in he lieraure do no examine he uni roo properies of gas consumpion, despie is imporance as an energy source and he need o grasp he likely efficacy of policies o increase he proporion of gas in elecriciy mix. The evidence

4 provided by he exising energy economics lieraure is mixed. Besides, here is no sudy ha venured ino he examinaion of he saionariy properies of naural gas consumpion on a muli-counry basis. The aim of he curren exercise is o examine he uni roo properies in naural gas consumpion for 44 counries over he period We address a gap in he exising energy economics lieraure by no only considering he uni roo properies of naural gas consumpion in he U.S, bu also in several counries, as well. II. Mehodology and daa The radiional uni roo ess like Augmened Dickey Fuller, (1979), Phillips Perron (1988) and Perron (1990) are found o be biased owards he non-rejecion of null hypohesis in presence of srucural breaks in a series. Following hese ess in he lieraure, Perron (1990) and Zivo and Andrews (1992) ried o deermine he saionariy properies of economic variables by endogenously capuring he srucural breaks semming from he series. Lumsdaine and Papell (1997) discovered he imporance of uni roo es wih wo srucural breaks in he series by modifying Zivo and Andrews (1992) uni roo es. Neverheless, hese advancemens were criicized by he saisicians due o he fac ha hese ess do no consider he presence of srucural breaks in he null hypohesis excep suggesing ha variables are found o be saionary in he presence of srucural breaks. Therefore, he presen sudy employs he uni roo procedure advanced by Lee and Srazicich (2003, 2004) o overcome such drawbacks and his allows us o es for a mos wo endogenous breaks using he Lagrange Muliplier (LM) es saisics. The LM uni roo es wih wo breaks developed by Lee and Srazicich (2003) represens a mehodological improvemen over he Dickey-Fuller-ype endogenous wo break uni roo es proposed by Lumsdaine and Papell (1997). This es has beer size and higher power, and ha i idenifies he srucural breaks more accuraely, han he es proposed by Lumsdaine and Papell (1997). By aking accoun of he srucural breaks in he per capia gas consumpion series would significanly increase he power of he uni roo ess and more significan resuls may be obained from he presen analyses. Our resuls are expeced o be more reliable and efficien due o superioriy of Lee and Srazicich (2003, 2004) uni roo es over he radiional uni roo ess. This es sands ou as a superior procedure as i provides for srucural breaks under boh he null and alernaive hypoheses. Allowing for he breaks under he null hypohesis is necessary in order o circumven spurious rejecions and invalid resuls (Lee and Srazicich, 2001). The es proceeds as follows: p ' 1 i i 1 S Z S S Here, is he difference operaor, while S i is he derended value of S i. The null of uni roo, 0 is esed agains he alernaive hypohesis 0. Srucural break is incorporaed ino he model wih Z, which is a vecor of exogenous variables. In a specificaion ha allows for a single change in boh level and rend, Z 1,, D1, DT1 where DT1 if T B 1, and 0, oherwise. D1 and DT1 are he dummy variables ha denoe he ime when a srucural break occurs in he level and rend respecively. To endogenously deermine he locaion of (1)

5 T j Bj / T, j 1, he minimum LM es in Lee and Srazicich (2004) is used. In a specificaion ha provides for wo changes in boh level and rend, Z 1,, D1, D2, DT1, DT 2 where DTj if TBj 1, j 1,2 and 0, oherwise. In his sudy, augmened erms of S i are inroduced o ensure here are no serial correlaions in he errors. 1 III. Empirical Findings The wo-break LM uni roo es resuls of gas consumpion per capia for he sampled 44 counries are repored in Table-1 (Algeria, Argenina, Ausralia, Ausria, Bangladesh, Belgium, Luxembourg, Brazil, Bulgaria, Canada, Chile, China, Colombia, Czech Republic, Ecuador, Egyp, France, Germany, Hungary, India, Indonesia, Iran, Ialy, Japan, Kuwai, Malaysia, Mexico, Neherlands, New Zealand, Pakisan, Peru, Poland, Qaar, Romania, Saudi Arabia, Slovakia, Spain, Swizerland, Taiwan, Thailand, Trinidad and Tobago, UAE, UK, US and Venezuela). The sudy covers he period of The daa for naural gas consumpion is colleced from BP Saisical Review of World Energy (hp:// The null hypohesis can be rejeced in 25 counries or 57% of he oal sample, wih eleven counries a 1% significance level, anoher nine counries a 5% significance level and he remaining five counries a 10% significance level. These resuls indicae ha flucuaions in naural gas consumpion per capia in hese counries are emporary. In oher words, random shocks o gas consumpion may lead o emporary deviaions from predeermined arge levels. In his case, any programme or iniiaive o enhance he naural gas consumpion in he counries may have lile impac on his form of energy as well as employmen and oupu (Smyh, 2013) 2. On he oher hand, null hypohesis canno be rejeced in 19 counries or 43% of he oal counries in our sudy. This implies ha energy policies and blueprins will have long-erm permanen impac on naural gas consumpion per capia. In sum, hese resuls provide mixed evidence for saionariy of naural gas consumpion per capia bu consisen wih Aslan (2011) and Apergis e al (2010) who esablished mixed findings for he U.S. Looking a he srucural breaks in Table-1, we observe a oal of 77 breaks wih 33 counries experiencing double breaks, while 11 counries generaing single srucural break wih no counry wihou break. The findings show ha 28 breaks or 36% of he oal breaks clusers around he lae 1970s cum he early 1980s, which was a period of significan changes in he global energy oulook. These incidens include energy crisis of 1979 ha was riggered by he Iranian revoluion and adversely affeced he counry s energy secor and global energy indusry 3. Besides, he world experienced he oil glu (caused by 1 To deermine he lag lengh of k we follow he process recommended by Campbell and Perron (1991) and Ng and Perron (1995). Saring wih an upper bound k max on k, k = k max is chosen if he exising lag is significan. If no, k is reduced by a uni unil he lag is significan. If none of he lags are significan, hen k = 0. In he empirical secion, we se k max = 8 and use he 10% value of he asympoic normal disribuion, 1.645, o deermine he significance of he las lag. 2 We differ from Smyh (2013) in his case who argues ha he policy implicaion should be reducion in fossil fuels, which naural gas is a componen. In pracice, naural gas is being promoed as a subsiue for oher forms of fossil fuels such as coal. 3 More han half of he world s gas reserves are in hree counries: Russia, Iran and Qaar (OPEC, 2010).

6 falling demand) in he early 1980s plus he oubreak of Iran-Iraq war (in Sepember, 1980), which severely affeced he global energy oulook (Hamilon, 2011; Noguera, 2013). Table-1: LM uni roo es wih wo srucural breaks Tes Lee and Srazicich es Counry T B1 T B2 T-Sa k Break poin(s) Algeria Argenina ** Ausralia Ausria (0.4, 0.6) Bangladesh * Belgium Luxembourg (0.4, 0.6) Brazil ** 6 (0.6, 0.8) Bulgaria *** 1 (0.4, 0.6) Canada (0.6, 0.8) Chile ** 5 (0.6, 0.8) China * Colombia (0.4, 0.8) Czech (0.4, 0.6) Ecuador ** 3 (0.6) Egyp *** 7 (0.4, 0.6) France (0.4, 0.6) Germany (0.6) Hungary (0.4) India (0.4, 0.8) Indonesia *** 3 (0.4, 0.8) Iran *** 6 (0.2, 0.4) Ialy ** 8 (0.4, 0.8) Japan (0.4, 0.8) Kuwai ** 7 (0.6, 0.8) Malaysia *** 3 (0.4, 0.8) Mexico ** 6 (0.4, 0.6) Neherlands * 8 (0.4, 0.8) New Zealand ** 8 (0.4, 0.6) Pakisan * 8 (0.4, 0.8) Peru (0.4, 0.6) Poland (0.4, 0.6) Qaar ** 7 (0.4, 0.8) Romania (0.8) Saudi *** 6 (0.4, 0.6)

7 Slovakia (0.4) Spain (0.4, 0.8) Swizerland *** 3 (0.4, 0.6) Taiwan (0.4, 0.6) Thailand *** 8 (0.4, 0.6) Trinidad *** 6 (0.4, 0.8) UAE *** 1 (0.6) UK (0.4, 0.8) US *** 5 (0.4, 0.6) Venezuela * 6 (0.6, 0.8) Criical values for Lee and Srazicich (2003) Y % 5% 1% 10% 5% 1% 10% 5% 1% T B is he esimaed break poins. *, ** and *** imply 1%, 5% and 10% levels of significance. Criical values in he lower panel of Table 3 are from Lee and Srazicich (2003), while he criical values for Lee and Srazicich (2004), one break ess are -5.05, and for a he 1, 5 and 10 % levels of significance. IV. Concluding Remarks and Fuure Direcions This paper invesigaed he uni roo properies of naural gas consumpion per capia by applying LM uni roo es wih wo srucural breaks and using he daa of 44 counries. The sudy used he period of Our empirical evidence provides mixed resuls on uni roo hypohesis. In 57% of sampled counries, he null hypohesis of uni roo hypohesis is rejeced. This implies ha variaions in naural gas consumpion per capia are ransiory in hese counries and as such policy iniiaives o enhance he use of naural gas consumpion will no be effecive. The null hypohesis of uni roo problem is rejeced in 43% of sample counries. This enails ha flucuaions in naural gas consumpion per capia are permanen and as such policy iniiaives o increase he use of naural gas consumpion will be effecive. Ambiguiy in empirical evidence regarding he uni roo properies opens up new challenges for he fuure research. For example, Lee and Srazicich, (2003, 2004) are no free from objecions. In he presence of more han wo srucural breaks, Lee and Srazicich, (2003, 2004) becomes unreliable and a new es may be needed o es he saionariy of naural gas consumpion. In such circumsances, Lee and Srazicich, (2013) is suiable uni roo es for invesigaing he saionary prosperiies of he naural gas consumpion per capia. Furher, his sudy can be augmened by he firs and second generaion panel uni roo ess for a suiable regional analysis. The availabiliy of disaggregaed naural gas consumpion daa would be more appropriae for esing uni roo properies. Reference Al-Iriani, M. A. (2006). Energy GDP relaionship revisied: an example from GCC counries using panel causaliy. Energy Policy, 34,

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