A VECM Analysis of the Impact of Economic Growth and Investment on Electricity Consumption in Indonesia

This paper employs a Vector Error Correction Model (VECM) analysis to investigate the influence of economic growth (GDP) and investment (FDI) on electricity consumption (EPC) in Indonesia. By examining annual data from 1971-2019, the study explores the short-term dynamics and long-run equilibrium relationships among the variables. A negative relationship is observed between EPC and GDP in the long run, while a negative relationship exists between EPC, GDP, and FDI in the short term. The short-run analysis reveals that GDP significantly influences EPC at the three-year horizon, and FDI has a significant negative effect on EPC at the one- and two-year horizons. Another result concerning the causality test indicate a unidirectional relationship between EPC and GDP, while EPC and FDI exhibit bi-directional causality. The findings underscore the influential role of GDP and FDI in driving changes in EPC. Understanding these relationships is crucial for policymakers and energy planners in effectively managing electricity demand, infrastructure investments, and sustainable economic growth. This research contributes to the existing literature by providing insights specific to Indonesia, guiding decision-making processes regarding energy infrastructure development, energy efficiency measures, and sustainable economic development.