The energy-growth nexus revisited: the role of financial development, institutions, government expenditure and trade openness

Although the energy-growth nexus has been widely investigated in the last several decades, there are still vivid debates in the energy economics field. This study evaluates the link between energy consumption and economic growth with the thorough assessment of the roles of institutional quality, government expenditure, financial development and trade openness in 46 Emerging Market and Developing Economies (EMDEs) from 1990 to 2014. By employing appropriate panel econometric techniques, cross-sectional dependence and slope heterogeneity are controlled, which helps explore the unbiased long-run effects of the determinants of economic growth as well as scrutinize the dynamic relationship among variables. The findings demonstrate that energy usage, gross fixed capital formation, government expenditure, financial development and trade openness positively and significantly impact the economic growth in the studied EMDEs. Moreover, Dumitrescu and Hurlin causality tests affirm the occurrence of feedback hypothesis in the connection between energy consumption and other variables including economic growth. Thus, it implies that energy consumption and economic growth are interdependent, which forms a basis for policy-makers to design effective energy and environmental policies. Toward the sustainable development goal, the author recommends the governments of EMDEs to contemplate the importance of finance-governance-trade relationship to economic growth alongside the implementation of energy-efficient policies.