Causal Inference and Shock Propagation in Energy-Economy Systems: Granger Causality and Variance Decomposition from VAR, VECM, and ARDL Frameworks

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@article{1718951,
      author = {R.Y Saidu, Yahaya Muhammad Musa, N.I Audi, Umaru Sani},
      title = {Causal Inference and Shock Propagation in Energy-Economy Systems: Granger Causality and Variance Decomposition from VAR, VECM, and ARDL Frameworks},
      journal = {Iconic Research And Engineering Journals},
      year = {2026},
      volume = {9},
      number = {12},
      pages = {2418-2429},
      issn = {2456-8880},
      url = {https://www.irejournals.com/formatedpaper/1718951.pdf},
      abstract = {This study investigates the causal directions and shock propagation mechanisms between energy consumption, fixed capital, inflation rate, labor force, and economic growth (GDP) in Nigeria over the period 1984–2023. While previous research has established long-run equilibrium relationships among these variables, the directions of causality and the relative contributions of shocks to forecast error variance remain inadequately understood, particularly in the context of unit roots and cointegration. Using three complementary econometric frameworks—Vector Autoregression (VAR), Vector Error Correction Model (VECM), and Autoregressive Distributed Lag (ARDL)—this paper examines Granger causality relationships and performs forecast error variance decomposition. The results reveal unidirectional causality running from fixed capital to GDP (F-statistic = 8.97, p = 0.0019) and from inflation to GDP (F-statistic = 6.54, p = 0.0110), with no evidence of reverse causality. Energy consumption does not Granger-cause GDP in the short run, though VECM long-run coefficients confirm its equilibrium impact. Variance decomposition shows that in the short run (period 1), 100% of GDP forecast error variance is self-explained; however, over longer horizons (period 10), fixed capital explains 27.8% of GDP variation, energy consumption explains 9.8%, and inflation explains 7.9%. Labor force contributes negligibly (0.05%). These findings imply that capital accumulation and price stability are the primary causal drivers of Nigerian economic growth, with energy consumption playing a supporting long-run equilibrium role rather than a short-run predictive role. Policy interventions targeting fixed capital formation and inflation management will have the most persistent and predictable effects on GDP.},
      keywords = {Granger Causality, Variance Decomposition, Energy Consumption, Economic Growth, VECM, VAR, ARDL, Shock Propagation, Nigeria},
      month = {June},
      doi = {https://doi.org/10.64388/IREV9I12-1718951}
  }