Dynamic specification of demand functions: A cointegration approach

The single-equation approach has been commonly used in the studies of energy demand. However, as most of the data used in the energy demand model are unlikely to be stationary, this factor has to be taken into account when estimating the demand behavior. To overcome this problem, the authors have applied the cointegration and error-correction models to model Chinese coal consumption data. In order to contrast their performance with such traditional models as Hendry's general-to-specific approach, a forecast error comparison exercise has been conducted. In terms of ex post forecast errors, the Engle-Granger error correction model outperforms other chosen models. By using the Engle-Granger approach, it is possible to obtain important information about the behavior of coal demand in China. (JEL C22).