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Is there any Causality between Financial Development, Energy Consumption and Economic Growth in Pakistan? Evidence from ARDL Bounds Testing Approach and Vector Error Correction Model

Faisal FAISAL, Turgut TÜRSOY, Nil Günsel REŞATOĞLU

Abstract



This paper investigates the dynamic relationship between financial development, economic growth and energy consumption in Pakistan during the period 1971-2013, including the period of global financial crisis, by using the ARDL approach. The empirical results revealed in this study show that financial development and economic growth are in a long-term equilibrium relationship; energy consumption converges to its long run equilibrium position by 13.15% speed of adjustment through the channels of financial development and economic growth. The robustness of the long results of the ARDL model was corroborated by FMOLS. Finally, the results of Granger causality under the framework of VECM suggest bidirectional causality between economic growth and financial development; while on the other hand, a feedback hypothesis was confirmed between energy consumption and financial development. Furthermore, unidirectional causality was found that runs from GDP to energy consumption. Our findings confirm the evidence of supply-side hypothesis and demand-side hypothesis in addition to the conservation hypothesis.
The study suggests the need for appropriate financial policy tools where proper implementation can safeguard Pakistan from the current energy crises by enhancing and strengthening the energy sector.

Keywords


Energy consumption, financial development, ARDL, VECM.

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