Modelling Energy Demand in Bangladesh: An Empirical Analysis

Energy plays a dynamic role in an economy. To understand the different events taking place in the energy market and the importance of the energy sector in the national economy, energy demand has to be understood thoroughly. To the best of our knowledge, no studies have been conducted for modelling energy demand in Bangladesh. The aim of this paper is to create an energy demand model for Bangladesh on the basis of annual data covering from 1980-2015. In this paper, we employed Augmented Dickey Fuller (ADF) unit root test to check stationarity of the variables. Johansen's Cointegration test is carried out to check the long run association ship among the variables. Granger Causality test and Vector Error Correction Model (VECM) are used to investigate the causalities among the variables of interest both in the long run and short run. Dynamic Ordinary Least Square (DOLS) method is used for estimating the long run price and income elasticities. All the variables are found to be stationary at their first differences. Cointegration test confirms the existence of cointegrating relationship among the variables. In the long run, there is no causal relationship between energy price and energy demand. Moreover, four more unidirectional relationships (energy demand to real income, household expenditure to energy demand, population to energy demand and energy demand to carbon emission) are observed. In the short run, there is a unidirectional causality running from energy price to energy demand and a bidirectional causality between energy demand and population. Estimation result reveals that the long run price and income elasticities are inelastic and income elasticity is smaller than price elasticity in absolute terms. Long run price and income elasticity are -0.75 and 0.45 respectively. As Bangladesh wishes to become upper middle income country by 2021, these findings might be useful for the policy makers to come up with appropriate combinations of policies so that demand for energy can be fulfilled optimally. Besides, policies ensuring cost reflective pricing scheme are encouraged to restructure the market. These will ensure energy security as well as can help the nation to achieve the desired goals effectively.