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Financial development and energy consumption nexus in Malaysia: A multivariate time series analysis

Author

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  • Islam, Faridul
  • Shahbaz, Muhammad
  • Ahmed, Ashraf U.
  • Alam, Md. Mahmudul

Abstract

Despite a bourgeoning literature on the existence of long run relationship between consumption of energy and economic growth, results on the direction of causality so far, remain elusive. A growing economy needs more energy, which is exacerbated by growing population. Evidence suggests that financial development can reduce energy use by increasing 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 explores the existence of a long run relation among energy use, aggregate production, financial development and population in Malaysia; and causality using 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.

Suggested Citation

  • Islam, Faridul & Shahbaz, Muhammad & Ahmed, Ashraf U. & Alam, Md. Mahmudul, 2013. "Financial development and energy consumption nexus in Malaysia: A multivariate time series analysis," Economic Modelling, Elsevier, vol. 30(C), pages 435-441.
  • Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:435-441
    DOI: 10.1016/j.econmod.2012.09.033
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    Keywords

    Financial development; Energy consumption; ARDL; Economic growth; Malaysia;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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