Relationship among Electricity Consumption, Economic Growth, Consumer Price Index and Foreign Direct Investment in Pakistan: A Time Series Analysis

Abstract

This research paper investigates a relationship among electric power consumption, economic growth, Consumer Price Index (CPI) and Foreign Direct Investment (FDI) in Pakistan, by applying Granger Causality Test for the period 1971-2010. Vector Error Correction Model has been applied to determine the short run and long run Causality. The empirical results have confirmed the presence of short run and long run Causality among variables. The results have shown the Bi-directional Granger Causality between Consumer Price Index and electric power consumption in Pakistan. Furthermore, the results reveal that there is evidence of bidirectional Causality between electric power consumption and Foreign Direct Investment. This implies that electric power consumption may increase in-flow of Foreign Direct Investment into Pakistan and thus reduce deficit and help in improving balance of payment. There is also evidence of Unidirectional Causality running from electric power consumption to economic growth. Findings of the study dictate that policy makers should be proficient enough to boost the economic fabric of the country.