Studies on the factors affecting economic growth have recently shifted the emphasis to the importance of natural resources, such as energy in fostering economic growth. However, the modelling of energy and capital assets in the production function remain underexplored, since these factors are strong complements. To this end, the joint effect of energy and capital, “effective capital” index, is proposed and significant positive results are presented.
This research is used to investigate how economic growth of the European Union (EU) region can be advanced with energy efficiency (EE) and effective capital. Contemporary “second-generation” methods (the cross-sectionally augmented autoregressive distributive lag, dynamic common correlated effects mean group and augmented mean group) that overcome “cross-sectional dependence”, “heterogeneity” problems and dynamics in the model are used. Annual data of the 27 EU countries from 1990 to 2019 is considered.
The major findings show that “effective capital”, EE and renewable energy factors are fundamental in fostering economic growth in EU. This research concludes by providing policies that can be adopted to enhance effective capital, clean fuels and the efficient use of energy to advance economic growth.
This research fosters improvement in the body of knowledge on the influence of “effective capital” on the growth of national income, considering the lack of studies that extensively examine this association. This research covers the research gap that is present in the literature by addressing the effect of “effective capital” on growth of national income and the impact of efficiency of energy and technology in enhancing growth of national income.
