The relationship between energy consumption, financial development and economic growth: an evidence from Malaysia based on ARDL

This study aims to examine the short-run and long-run relationship between economic growth, energy consumption, financial development, capital formation and population by using data set of Malaysia for the period 1971–2014. An emerging economy like Malaysia has high energy consumption which is intensified by its growing population. Economic growth and energy consumption in Malaysia have been rising over the past several years. The motivation to this study is related to four policy objectives of Malaysia; economic growth, financial development, energy conservation and reduction on pollution. The auto regressive distributed lag (ARDL) bounds testing approach to test the long run relationship among the variables, while short run dynamics were investigated using the Vector Error Correction Model (VECM). Variance decomposition (VDC) technique was used to provide Granger causal relationship between the variables. The findings suggest that energy consumption is influenced by economic growth and financial development, both in the short and the long run. The population–energy relationship however only holds in the long run. The results have important policy implications for balancing economic growth vis-à-vis energy consumption for Malaysia, and other emerging nations to explore new and alternative sources of energy to meet the rising demand of energy to sustain economic growth.