Dynamics between Financial Development, Renewable Energy Consumption, and Economic Growth: Some International Evidence

Abstract

This thesis investigates the dynamics between financial development, renewable energy consumption, and economic growth in comparative analyses across 123 countries from 1990 to 2017. In the comparative analyses, we considered four income groups, namely low-income (LIC), lower-middle-income (LMC), upper-middle-income (UMC) and high-income (HIC) countries, but also five major regions such as Asia Pacific (APA), Europe & Central Asia (ECS), America (AMA, North America & Latin America and The Caribbean), Middle-East and North Africa (MENA) and Sub-Saharan Africa (SSA). This research is motivated by the need to show whether financial development may contribute to the protection of the planet (clean energy) and the eradication of poverty around the world. We also highlight the importance of good governance quality and renewable energies for achieving sustainable development goals (SDGs). This project is in line with the SDGs initiated by the United Nations to arouse attention towards clean water and sanitation, decent work and economic growth, peace, justice, and strong institutions affordable and clean energy in response to global warming. Hence, energy-saving technologies, i.e., renewable energies and sustainable growth, may play critical roles in this regard. The scrutiny of the empirical literature reveals that few studies have examined the nonlinear relationship between financial development, renewable energy consumption and economic growth in comparative analyses across different income groups and different regions while considering the multidimensional aspects of financial development. Notably, this study analyzes the nonlinear effects of financial development on renewable energy consumption and economic growth using different financial indicators. In a disaggregated approach, we alternatively use these indicators to represent four aspects of financial development, i.e., financial depth, financial efficiency, financial inclusion, and financial stability. Besides, this study examines the moderating effect of the quality of governance of public institutions on the relationship between financial development, renewable energy consumption, and economic growth across income levels and regions, unlike previous studies. In an aggregated approach, we built composite indexes of financial development and governance quality using eight (8) financial variables and six (6) indicators of governance quality. We make these indexes through the principal component analysis (PCA) technique to derive the overall effect of financial development on renewable energy consumption and growth while avoiding multicollinearity problems and the arbitrary choices of variables. The study also includes ten (10) control variables to avoid bias arising from omitted variables. The different estimations were performed by using two-stage least squares (2SLS), difference-GMM and system-GMM in most cases to deal with endogeneity problems, as well as to provide robust and reliable results. We also examined the causal relationships between financial development, renewable energy consumption, and economic growth using the panel vector autoregressive model (Panel VAR) following a similar approach to Granger causality framework with the GMM models. The study also provides detailed discussions of the results and specific policy implications for achieving the sustainable development goals in response to global warming across countries. These policy implications are well discussed in the last section of this thesis.