Abstract

The current paper attempts to examine the causal relationship between electricity consumption (EC), consumer price index (CPI), gross domestic product (GDP) and foreign direct investment (FDI). Time series data were used for these variables for 1971 to 2009 period. The vector error correction model (VECM) was employed to estimate the causal relationship between electricity consumption with respective independent variables. All variables were found to be co-integrated indicating the existence of long run relationship among them. Furthermore, the result for long run causality from electricity consumption to FDI, GDP growth and inflation was found to be significant. The results suggest that electricity consumption is an important element determining economic growth in Malaysia and a powerful tool in executing government policy for energy saving. Policy makers should be aware of the importance of stable electricity supply in order to achieve sustainable economic growth.

Key words: Electricity consumption, unit root test, co-integration, vector error correction model, Malaysia.