Nexus between financial development & energy intensity: two sides of a coin?

Abstract

This study examines the multidimensional impact of financial development (FD) on consumption energy intensity and production energy intensity. A global sample of 81 economies consisting of three subsamples (29 high income [HIEs], 21 upper middle income [UMEs] and 31 low and lower middle income [LMEs]) from 1997 to 2013 is analyzed by employing several estimators and an inclusive estimation strategy for empirical robustness. Our key findings suggest that: First, FD is broadly found to increase production energy intensity except for the negative effects of financial institutions’ efficiency. The results also confirm the long-run relationship. The financial depth and financial access appear to reduce consumption energy intensity, while financial efficiency has the opposite effect. Financial institutions have increasing, while financial markets have decreasing impact on consumption energy intensity in the long run. Second, in the face of an oil price shock, countries with higher levels of FD experience a reduce production energy intensity, while the countries with stronger financial institutions experience a reduction in consumption energy intensity, however, opposite is true in the case of financial markets. Third, the FD appears to decrease production energy intensity in HIEs, while it has increasing effect in UMEs and mixed effects in LMEs. Meanwhile, the FD induces higher consumption energy intensity in LMEs, which is same for the impacts of financial markets in UMEs and HIEs. Lastly, financial institutions appear to reduce consumption energy intensity in UMEs and HIEs. Our findings have profound policy implications in the context of the debate on the role of finance in energy efficiency.