How Large is the Economy-Wide Rebound Effect in Middle Income Countries? Evidence from Iran

 

We have a new working paper in our rebound effect series. Previous papers reviewed the literature on the economy-wide rebound effect, estimated the economy-wide rebound effect for the United States, and estimated it for some European countries (as well as the United States). The new paper is about Iran. This is a middle income country with a resource intensive and quite regulated economy. Is it a lot different to the developed economies we have already looked at?

The rebound effect is large in Iran too. A major difference between Iran and the developed economies is that energy intensity has been rising in Iran:

 

Total energy use tripled from 1988 to 2017, which is the sample period used in our econometric analysis (quarterly data):

The econometric model is the same as that used in the US paper that is now published in Energy Economics, except we only use the distance covariance method for the independent component analysis in this paper. The next figure shows the estimated impulse response functions of energy, GDP, and the price of energy to energy efficiency, GDP, and price shocks:

The top left panel shows the rebound effect. Initially, there is a large drop in energy use, but this diminishes over time. We estimate that the rebound is 84% after six years. The confidence interval is wide and includes 100%.

On the other hand, the GDP shock has large positive effects on energy (top middle panel) and GDP (middle). These are similar in size. By contrast, in the US, the effect on energy is much smaller than on GDP. This seems to be "why" energy intensity falls in the US but rises in Iran.

In this paper we also conduct a forecast error variance decomposition:

This shows how much each of the shocks explain each of the variables at different time horizons. Energy efficiency shocks explain most of the forecast error variance in the first few quarters after a shock. But over time, the GDP shock comes to explain most of the forecast error variance. This is why I argue that the relative GDP shocks are what drives energy intensity.

The paper is coauthored with Mahboubeh Jafari at Shiraz University and Stephan Bruns at University of Hasselt.