The Threshold Effect of Economic Complexity on Energy Consumption in Iran Using Smooth Transition Regression Model

The economic complexity index is one of the latest published indicators to measure the level of knowledge and technology in countries. In this paper, using a smooth transition regression model, the effect of economic complexity on energy consumption is evaluated for the first time in the Iranian economy during the period 1971-2013. The results of the model estimation confirm the existence of a nonlinear relationship between per capita income, real energy price index, and the complexity of the economy with per capita energy consumption. Also, economic complexity leads to a two-regime structure with a threshold of -1.15. So that in the first regime, which is related to the low levels of economic complexity, the effect of this variable on energy consumption was positive, that could be due to the rebound effects of technology on energy consumption. In the second regime, which is related to higher levels of complexity, the relationship was negative. Therefore, in the second regime, improving the level of complexity can help to save energy. On the other hand, the elasticity of income and price in both regimes was less than one, but as the complexity passing the threshold, the elasticity has increased in particular with respect to price, which indicates that with the increase of technology and knowledge of the country, the power of the reaction of consumers to the price changes will increase.