Co-Movement Among Electricity Consumption, Economic Growth and Financial Development in Portugal, Italy, Greece, and Spain: A Wavelet Analysis

The aim of this paper is to examine the connections among time-frequency dependencies associated with electrical power consumption (EPC), economic growth, and financial development (FD) in Portugal, Italy, Greece, and Spain during the period 1970-2014. Using monthly data collected from the World Bank (WB) and Federal Reserve Bank of St. Louis (FRED), the wavelet analysis is applied, which allows for assessing the co-movement between these variables. As a first step, a classical time-domain approach is used to alternatively test the connection, including unit-root tests and cointegration. To achieve a comprehensive understanding of the relationships between EPC, economic growth, and FD, we employ Wavelet Transform Coherency (WTC) and Partial Wavelet Coherency (PWC) to explore both their temporal and phase-based dynamics. The main findings show that EPC leads FD, but in the short term, and periods dominated by economic stagnations and political crises. Otherwise, FD drives EPC in the medium term, under economic expansion periods. In both cases, economic growth is crucial, being a strong binding force of the interaction between EPC and FD. The difference in the applied results provides alternative policy implications, justifying the use of the wavelet approach.