The nexus between financial development and energy consumption in the EU: A dynamic panel data analysis

- We study the impact of financial development on energy consumption in the EU.
- No significant relation is detected in the EU-27.
- Greater financial development leads to an increase in energy consumption in the EU-15.
- Measurement of financial development does not matter for the old members.
- The impact of the new members depends on how financial development is measured.

The relationship between financial development and energy consumption has newly started to be discussed in energy economics literature. This paper investigates this issue in the EU over the period 1990-2011 by using system-GMM model. No significant relationship is found in the EU27. The empirical results, however, provide strong evidence of the impact of the financial development on energy consumption in the old members. Greater financial development leads to an increase in energy consumption, regardless of whether financial development stems from banking sector or stock market. By contrast, we find for the new members that the impact of financial development on energy consumption depends on how financial development is measured. Using bankindex the impact of financial development displays an inverted U-shaped pattern while no significant relationship is detected once it is measured using stockindex.