Oil Consumption and Economic Growth in China: A Multivariate Cointegration Analysis

Using an aggregate production model where capital, labor and energy are treated as separate inputs, this paper tests for the existence and direction of causality between output growth and oil consumption in China. Using the Johansen cointegration technique, the empirical findings indicate that there exists long-run cointegration among output, labor, capital and oil consumption in China. Then using a VEC specification, the short-run dynamics of the interested variables are tested; indicating that there exists bilateral Granger-causality running between oil consumption and GDP. We thus further analyze the policy implications.