Financial Development and Economic Growth in Oil-Dependent Economy: The case of Bahrain

This paper attempts to identify the relationship between energy consumption, oil prices, market shares, dividend yields and economic growth for the Kingdom of Bahrain from year 2006 to 2016. For this purpose, unit root test, Johansen cointegration techniques for analysing the long run relationship, and Vector Error Correction Model (VECM) are used. The key findings are summarized as follow: (i) long run relationship exists between the suggested variables. (ii) Both energy and financial markets are significant in the long run relationship, and positively affect the economic growth of Bahrain. (iii) According to the estimated ECM term, the model is stable in the short run. (iv) Decline in the international price of oil has negative significant drawback on the economic growth of Bahrain. Accordingly, it is recommended that policy makers in the Kingdom of Bahrain focuses on implement strong strategies that aim at encouraging investments in non-oil sectors and carbon emissions reduction policy in the long run without impeding energy sector or economic growth in order to move towards sustainability