The validation of Granger causality through formulation and use of finance-growth-energy indexes

The paper aims to investigate the finance-growth-energy nexus validity in Pakistan by taking large range of relevant variables and developing indexes. Focus of the paper is to evaluate the long run relationship between financial development, economic development and energy consumption. After extracting the indices, Granger's Ordinary Least Squares (OLS) regression and correlation is used to explain short run deviation in the nexus. In order to capture co-integration, Eagle Granger approach is applied, lastly Hurst exponent are used to estimate annual rescaled range statistics to explain deviation during period of analysis. Granger causality has been empirically tested in a robust way incorporating large range of relevant variables on overall nexus of finance-growth-energy that has been hardly tested in such depth. Index formation through econometric analysis is novel part of this study, which revealed that in short run Financial Development Index (FDI), and energy price have significant relationship with energy consumption. However, in long run analysis has endorsed the concept of granger casualty, especially on feedback hypothesis. Study has practical and theoretical contribution to the literature that could be highly beneficial to policy makers.