Financial Development and Energy Consumption Nexus in Malaysia: A Multivariate Time Series Analysis

Islam, F., Shahbaz, M., Ahmed, A.U., and Alam, M.M. 2013. Financial Development and Energy Consumption Nexus in Malaysia: A Multivariate Time Series Analysis, Economic Modelling. Vol. 30, pp. 435- 441.

28 Pages Posted: 29 Mar 2017

See all articles by S.M. Islam

S.M. Islam

Khwaja Yunus Ali University - Department of Business Administration

Muhammad Shahbaz

Comsats University Islamabad

Ashraf Uddin Ahmed

Morgan State University

Md. Mahmudul Alam

Universiti Utara Malaysia

Date Written: 2013

Abstract

Despite a bourgeoning literature on the existence of a long-run relationship between energy consumption and economic growth, the findings have failed to establish clearly the direction of causation. A growing economy needs more energy, which is exacerbated by growing population. Evidence suggests that financial development can reduce overall energy consumption by achieving energy efficiency. Economic growth and energy consumption in Malaysia have been rising in tandem over the past several years. The three public policy objectives of Malaysia are: economic progress, population growth and financial development. It is of interest to the policymakers to understand the dynamic interrelation among the stated objectives. The paper implements Auto Regressive Distributed Lag (ARDL) approach to cointegration to examine the existence of a long-run relationship among the series: energy consumption, population, aggregate production, and financial development for Malaysia; and tests for Granger causality within the Vector Error Correction Model (VECM). The results suggest that energy consumption is influenced by economic growth and financial development, both in the short and the long-run, but the population-energy relation holds only in the long run. The findings have important policy implications for balancing economic growth vis-à-vis energy consumption for Malaysia, as well as other emerging nations.

Keywords: Financial development; Energy consumption; ARDL; Economic growth

JEL Classification: C32; O53; Q20; Q43

Suggested Citation

Islam, S.M. and Shahbaz, Muhammad and Ahmed, Ashraf Uddin and Alam, Md. Mahmudul, Financial Development and Energy Consumption Nexus in Malaysia: A Multivariate Time Series Analysis (2013). Islam, F., Shahbaz, M., Ahmed, A.U., and Alam, M.M. 2013. Financial Development and Energy Consumption Nexus in Malaysia: A Multivariate Time Series Analysis, Economic Modelling. Vol. 30, pp. 435- 441. . Available at SSRN: https://ssrn.com/abstract=2942584

S.M. Islam

Khwaja Yunus Ali University - Department of Business Administration ( email )

Sirajgonj
Bangladesh

Muhammad Shahbaz

Comsats University Islamabad ( email )

Park Road
Chak Shahzad
Islamabad, North-West Frontier Province 44000
Pakistan

Ashraf Uddin Ahmed

Morgan State University ( email )

1700 E. Cold Spring Ln
Baltimore, MD 21251
United States

Md. Mahmudul Alam (Contact Author)

Universiti Utara Malaysia ( email )

Sintok, Kedah
Malaysia

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