Nexus between Financial Development and Energy Consumption: Experience from Bangladesh

Rajib Mahmood and Sakib Bin Amin

Energy can be considered as the backbone of the economy and financial progress is the legs upon which it is standing. Bangladesh being one of the most overpopulated country in the world has managed to maintain an approximate 6% growth rate over the past decade. This has been made possible through a combined effort of providing sufficient resources to the people. This paper analyses the relationship between two of the most important variable in sustaining growth and development, financial development and energy consumption in Bangladesh. Lack of study to show the relationship between these sectors in Bangladesh had caused some restriction in understand the sectors congruously. Domestic credit provided to the finance sector and energy use has been used as the indicators for financial development and energy consumption respectively in this paper. Augmented Dickey Fuller (ADF) for unit root test have been orchestrated in this analysis. Furthermore, ARDL cointegration test have been performed. Finally, the granger causality has been applied in order to accomplish the outcomes of this paper. The results showed a bi-directional causality between the two variables taken into account. Financial development leads to an increase in the energy use and increasing energy consumption also led to increasing financial growth. However, the causality ran only in the short run and no relationship in the long run. This was the case for both direction of causality. Policy implication for Bangladesh at the conclusion of this research paper would be for the government to provide flexible economic policies to encourage further investments in both financial sector and energy sector.