Electricity Consumption, Financial Development and Economic Growth Nexus: A Revisit Study of Their Causality in Pakistan

This study contributes to energy economic literature by incorporating financial development in neo-classical production function to investigate the electricity consumption and economic growth nexus in case of Pakistan. ARDL bounds testing approach has been applied to examine cointegration between the series over the period of 1971-2009. The direction of causal relationship between the variables is tested by applying VECM Granger causality approach and robustness of causality has been checked by innovative accounting approach (IAA). Our findings confirm the existence of cointegration among the variables. The results indicate that financial development, electricity consumption, capital and labour contribute to economic growth. The VECM Granger causality analysis reveals that feedback hypothesis is found between electricity consumption and economic growth, financial development and electricity consumption, economic growth and financial development, capital and economic growth and, capital and financial development. This implies that energy (electricity) conservation policies will not be appreciated in case of Pakistan. Furthermore, government of Pakistan should encourage making investments on research and development to articulate new energy savings technology to sustain economic growth. In this manner, financial sector should launch new financial policy to encounter the rising demand for electricity and enhance the process of capitalization to raise economic growth by offering and distributing financial resources to efficient and profit oriented ventures