№ 34 (2) 2014 ПРИКЛАДНАЯ ЭКОНОМЕТРИКА APPLIED ECONOMETRICS T. Omay, M. Hasanov, N. Uзar Evidence from nonlinear panel cointegration and causality tests In this paper, we examine nonlinear interrelationship between energy consumption and output level for a panel of G7 countries. <...> For this purpose, we propose a nonlinear cointegration test in heterogeneous panels for testing the presence of a cointegrating relationship that follows a globally stationary exponential smooth transition (ESTR) process, and apply our test for investigating long-run relationship between energy use and economic growth in the case of the G7 countries. <...> After establishing long-run relationship between energy consumption and output, we estimate a Panel Smooth Transition Vector Error Correction Model and apply nonlinear Granger causality tests in order to analyze the direction of the causality between these variables. <...> We find that the causality between energy consumption and output level is dependent on the phases of business cycle. <...> Keywords: nonlinear panel cointegration; nonlinear Panel Vector Error Correction Model; cross section dependency. <...> However, since energy is considered as an essential factor of production by many energy economists, e. g., (Stern, 2000; Oh, Lee, 2004; Ghali, El-Sakka, 2004; Beaudreau, 2005; Lee, Chang, 2008), it is argued that reducing energy consumption may hamper economic growth and hence increase unemployment. <...> On the other hand, the proponents of the so-called «conservation hypothesis» argue that the positive relationship between energy consumption and output level stems from positive effects of output growth rate on energy consumption, and hence policies aimed at conserving energy consumption will have only a limited, if any, adverse effect on economic growth. <...> Similarly, supporters of the «neutrality hypothesis» argue that energy consumption and output level are not correlated, and therefore neither energy conservation nor energy promoting policies will affect economic growth of countries (see, for example, (Lee, Chang, 2008; Apergis, Payne, 2009; Ozturk, 2010)). <...> The interest of energy economists on this issue gained Energy consumption and economic growth: T. Omay, M. Hasanov, N. Uзar APPLIED ECONOMETRICS ПРИКЛАДНАЯ ЭКОНОМЕТРИКА № 34 (2) 2014 between energy consumption and output level, it is <...>