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The Dynamic Link between Energy Consumption, Economic Growth, Financial Development and Trade in China: Fresh Evidence from Multivariate Framework Analysis

Muhammad, Shahbaz and Saleheen, Khan and Mohammad, Iqbal Tahir (2012): The Dynamic Link between Energy Consumption, Economic Growth, Financial Development and Trade in China: Fresh Evidence from Multivariate Framework Analysis.

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Abstract

This study investigates the relationship between energy consumption and economic growth by incorporating financial development, international trade and capital as important factors of production function in case of China over the period of 1971-2011. The ARDL bounds testing approach to cointegration was applied to examine long run relationship among the series while stationarity properties of the variables was tested by applying structural break test.

Our empirical evidence confirmed long run relationship among the variables. The results showed that energy consumption, financial development, capital, exports, imports and international trade have positive impact on economic growth. The Granger causality analysis revealed that unidirectional causal relationship running from energy consumption to economic growth. Financial development and energy consumption Granger cause each other. There is bidirectional causality between trade and energy consumption. The feedback relation exists between financial development and international trade. There is also bidirectional causality exists between capital and energy consumption, financial development and economic growth and, international trade and economic growth. This paper makes significant contribution in energy literature and opens up new direction for policy makers to explore new and alternative sources of energy to meet the rising demand of energy due to sustained rate of economic growth.

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