The financial development-energy consumption nexus revisited

This study investigates the impact of financial development on energy consumption for a panel of 32 high-income countries over the period 1990-2014. Unlike previous studies, this analysis incorporates the bond market alongside the banking sector and the stock market in defining financial development. This study utilizes principal component analysis to construct indices for each of the three financial sectors (banking sector, stock market, and bond market) as well as an overall financial development index. Moreover, unlike previous studies, this study also implements heterogeneity panel estimation techniques. The results of this study reveal the absence of a statistical relationship between the overall financial development index and energy consumption. However, it is observed that an increase in the stock market index yields a slight decline in energy consumption. Policy implications pertaining to the empirical results are also discussed.