The Impact of Financial Development on Energy Demand: Evidence from China

ABSTRACT

An autoregressive distributed lag (ARDL) bounds approach and vector error correction model (VECM) are used here to better understand the role of financial development in energy demand in China. Based on data from 1980 to 2014, the ARDL bounds approach yields empirical evidence that confirms the existence of long-run relationships among energy demand per capita, gross domestic product per capita, urbanization, economic structure, and financial development. The VECM framework shows the direction of Granger causality that combines the short run and the long run between the variables. The results suggest a feedback effect between financial development and energy demand per capita in the long run. However, financial development Granger causes per capita energy demand without a feedback effect in the short run. The results of this research may be of great importance for decision makers as they develop policies on energy and economic growth.

KEY WORDS:

• cointegration analysis
• economic structure
• energy demand
• financial development
• urbanization

Acknowledgments

The authors particularly appreciate the insightful and helpful comments and suggestions from two anonymous reviewers and the editor of this journal, Ali Kutan.

Notes

^1. These data come from the National Bureau of Statistics of China (NBSC).

^2. In this study, urban population refers to the people living in the urban area of China. The China Statistical Yearbook compiled by the NBSC, including data on the urban population in the entire country and by province.