Exploring the Trade Openness, Energy Consumption and Economic Growth Relationship in Iran by Bayer and Hanck Combined Cointegration and Causality Analysis

This paper aims to investigate the direction of causality between economic growth, energy consumption and trade openness in case of Iran for the period 1967–2012. We apply the newly developed combined cointegration test proposed by Bayer and Hanck (2013). Vector Error Correction Model (VECM) is applied to determine the direction of causality between these three variables. The result of Bayer-Hanck cointegration test reveals the existence of cointegration between variables. The causality analysis indicates just a unidirectional causality from energy consumption to trade openness in short run. The long run causality test explores the bidirectional causality between economic growth and energy consumption, and between openness and energy consumption as well as unidirectional Granger causality from openness to economic growth. In addition, we used variance decomposition method and impulse response functions to show the dynamics of these relationships that confirmed low energy efficiency. This paper provides policy makers with insights to design policies for economic growth with a view to energy consumption and trade.