Impact of Financial Development on Energy Consumption in Middle Income Countries

The study investigated the impact of financial development on energy consumption in middle income countries using panel data (2001-2016) within the dynamic generalized methods of moments (GMM) econometric estimation technique. Unlike previous similar research work that suffers from omitted variable bias, this study introduced a third variable, known as trade openness. Apart from model 5, all the other four models produced results which show that financial development had a significant positive effect on energy consumption in middle income countries. These results are to a very large extent supported by literature. The study therefore urges middle income countries to implement policies that ensures that financial development plays a critical role in developing clean and efficient energy usage machinery and equipment. Except for model 5, the study also noted that the complementarity between financial development and trade openness had a significant positive impact on energy consumption in models 1, 2, 3 and 4. In other words, trade openness was found to be a channel through financial development increased its positive influence on energy consumption in middle income countries. The study therefore urges middle income countries to import machinery and equipment that are energy consumption saving and efficient in order to complement financial sector’s effort to contribute towards development of clean energy and energy efficient technology. Further research must investigate other channels that shapes financial development’s influence on energy consumption not only in middle income countries but in other economic groupings as well.