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Financial Development, Economic Growth, and Electricity Demand: A Sector Analysis of an Emerging Economy

Roubaud, David and Shahbaz, Muhammad (2018): Financial Development, Economic Growth, and Electricity Demand: A Sector Analysis of an Emerging Economy.

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Abstract

We employ an augmented production function to examine the association between electricity consumption and economic growth at the aggregate and sectoral levels for the period 1972-2014 for Pakistan. We posit that financial development is an important driver of electricity consumption and economic growth. The unit root test, combined cointegration framework, and VECM Granger causality approach are applied. There is a long-term association between the variables at the aggregate and sectoral levels. Electricity consumption and financial development stimulate economic growth. The causality analysis validates the presence of the feedback effect between economic growth and electricity consumption. Bidirectional causality exists between financial development and electricity consumption in the agriculture and services sectors. Financial development drives electricity consumption in the industrial sector. Policies have to be implemented to maintain sufficient electricity supply for economic growth. The financial sector should incentivize investment in renewable energy to reduce Pakistan’s heavy reliance on oil imports.

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