Commenced in January 2007
Frequency: Monthly
Edition: International
Paper Count: 31529
Granger Causal Nexus between Financial Development and Energy Consumption: Evidence from Cross Country Panel Data

Authors: Rudra P. Pradhan


This paper examines the Granger causal nexus between financial development and energy consumption in the group of 35 Financial Action Task Force (FATF) Countries over the period 1988-2012. The study uses two financial development indicators such as private sector credit and stock market capitalization and seven energy consumption indicators such as coal, oil, gas, electricity, hydro-electrical, nuclear and biomass. Using panel cointegration tests, the study finds that financial development and energy consumption are cointegrated, indicating the presence of a long-run relationship between the two. Using a panel vector error correction model (VECM), the study detects both bidirectional and unidirectional causality between financial development and energy consumption. The variation of this causality is due to the use of different proxies for both financial development and energy consumption. The policy implication of this study is that economic policies should recognize the differences in the financial development-energy consumption nexus in order to maintain sustainable development in the selected 35 FATF countries.

Keywords: Financial development, energy consumption, Panel VECM, FATF countries.

Digital Object Identifier (DOI):

Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 1076


[1] K. Zaman, Z. Izhar, M. M. Khan, and M. Ahmad, “The Relationship between Financial Indicators and Human Development in Pakistan,” Economic Modelling, vol. 29, no. 5, pp. 1515-1523, September 2012.
[2] P. Sadorsky, “The Impact of Financial Development on Energy Consumption in emerging Economies,” Energy Policy, vol. 38, no. 1, pp. 2528-2535, May 2010.
[3] S. M. Ziaei, “Effects of Financial Development Indicators on Energy Consumption and CO2 Emission of European, East Asian and Oceania Countries,” Renewable and Sustainable Energy Reviews, vol. 41, no. 1, pp. 818-829, February 2015.
[4] R. Komal, and F. Abbas, “Linking Financial Development, Economic Growth and Energy Consumption in Pakistan,” Renewable and Sustainable Energy Reviews, vol. 44, no. 1, pp. 211-220, April 2015.
[5] F. Islam, M. Shahbaz, A. U. Ahmed, and M. M. Alam, “Financial Development and energy Consumption Nexus in Malaysia: A Multivariate Time series Analysis,” Economic Modelling, vol. 30, no. 2, pp. 435-441, January 2013.
[6] A. Jalil, and M. Feridun, “The Impact of Growth, Energy and Financial Development on the Environment in China: A cointegration analysis,” Energy Economics, vol. 33, no. 2, pp. 284-291, March 2011.
[7] A. Omri, S. Daly, C. Rault, and A. Chaibi, “Financial Development, Environment Quality, Trade and Economic Growth: What Causes What in MENA Countries?” Energy Economics, vol. 48, no. 3, pp. 242-252, March 2015.
[8] A. A. Rafindadi, and I. Ozturk, “Effects of Financial Development, Economic Growth, and Trade on electricity Consumption: Evidence from Post-Fukushima Japan,” Renewable and Sustainable Energy Reviews, vol. 54, no. 1, pp. 1073-1084, February 2016.
[9] A. Chang, “Effects of Financial Development and Income on Energy Consumption,” International Review of Economics and Finance, vol. 35, no. 1, pp. 28-44, January 2015.
[10] A. Aslan, N. Apergis, and M. Topcu, “Banking Development and Energy Consumption: Evidence from a Panel of Middle Eastern Countries,” Energy, vol. 72, no. 1, pp. 427-433, August 2014.
[11] S. Coban, and M. Topcu, “The Nexus between Financial Development and Energy Consumption in the EU: A Dynamic Panel Data Analysis,” Energy Economics, vol. 39, no. 3, pp. 81-88, September 2013.
[12] A. Alam, I. A. Malik, A. B. Abdullah, A. Hassan, A. U. Faridullah, G. Ali, K. Zaman and I. Naseem, “Does Financial Development Contribute to SAARC’s Energy Demand? For Energy Crisis to energy Reforms,” Renewable and Sustainable Energy Reviews, vol. 41, no. 3, pp. 818-829, January 2015.
[13] D. Holtz- Eakin, W. Newey, and H. S. Rosen, “Estimating Vector Auto Regressions with Panel Data,” Econometrica, vol. 56, no. 6, pp. 1371-1395, November 1988.
[14] A. Levine, C. F. Lin, and C. S. Chu, “Unit Root Tests in Panel Data: Asymptotic and Finite Sample Properties,” Journal of Econometrics, vo. 108, no. 1, pp. 1-24, May 2002.
[15] K. S. Im, M. H. Pesaran, and Y. Shin, “Testing for Unit Roots in Heterogeneous Panels,” Journal of Econometrics, vol. 115, no. 1, pp. 53-74, July 2003.
[16] P. Pedroni, “Critical values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors,” Oxford Bulletin of Economics and Statistics, vol. 61, no. S1, pp. 653-670, November 1999.
[17] G. S. Maddala, and S. Wu, "A Comparative Study of Unit Root Tests with Panel Data and New Sample Test. Oxford Bulletin of Economics and Statistics, vol. 61, no. S1, pp. 631-652, November 1999.
[18] I. Choi, “Unit Root Tests for Panel Data,” Journal of International Money and Finance, vol. 20, no. 2, pp. 249-272, April 2001.