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Energy xxx (2014) 1e7

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Energy

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Banking development and energy consumption: Evidence from apanel of Middle Eastern countries

Alper Aslan a, *, Nicholas Apergis b, Mert Topcu a

a Nevsehir Haci Bektas Veli University, Faculty of Economics and Administrative Sciences, 50300 Nevsehir, Turkeyb Department of Economics, Curtin University, Perth, Australia

a r t i c l e i n f o

Article history:Received 19 November 2013Received in revised form13 May 2014Accepted 16 May 2014Available online xxx

Keywords:Financial developmentEnergy consumptionMiddle Eastern CountriesPanel data

* Corresponding author. Tel.: þ90 384 228 11 10, þE-mail addresses: alperaslan@nevsehir.edu.tr, alp

Nick.Apergis@curtin.edu.au (N. Apergis), merttopcu@

http://dx.doi.org/10.1016/j.energy.2014.05.0610360-5442/© 2014 Elsevier Ltd. All rights reserved.

Please cite this article in press as: Aslan A,countries, Energy (2014), http://dx.doi.org/1

a b s t r a c t

Since the late 1990s, much scholarly work has been done in the field of energy economics on the nexusbetween economic growth and energy consumption. Over the last decade, however, the literature has beenrecompiled through examining the relationship between energy consumption and a set of variables byreferring to the implicit role of economic growth. Based upon finance-energy nexus, this paper attempts toinvestigate the linkage between the banking development and energy consumption for a panel of sevenMiddle Eastern countries using panel cointegration and causality techniques over the period 1980e2011.Panel cointegration results show a long-run relationship between energy consumption, income, energyprices and banking sector development indicators. FMOLS (Fully Modified OLS) results reveal that allbanking sector indicators affect energy demand positively in the long-run and the impact range falls be-tween 0.169 and 0.396. In terms of causality, there is evidence of a one way short-run relationship frombanking expansion to energy consumption while long-run dynamics indicate a bi-directional feedbackrelationship. These results have some implications for energy and environmental policy. One mainimplication is that energy conservation policies may be implemented with little or no adverse impact onfinancial development in the short-run whereas they might become detrimental in the long-run.

© 2014 Elsevier Ltd. All rights reserved.

1. Introduction

The nexus between energy consumption and economic growthprovides anextensive literature for a largenumberof cases across theglobe [1e4]. The financial development-economic growth nexus hasbeen also extensively investigated [5e9]. Sadorsky [10] definesfinancial development as a crucial driver of economic growth inemergingeconomiesand it is thus likely thathigher levelsoffinancialdevelopment affect energy demand. Unlike aforementioned re-lationships, however, the impact that financial development has onenergy demand is an issue that has received very little attention.

Inspired from finance-led-growth theory, Sadorsky [11] ad-dresses the linkage between financial development and energyconsumption as follows: “financial development stimulates anumber of changes within a country including, for example, areduction in financial risk and borrowing costs, greater trans-parency between lenders and borrowers, access to greater financialcapital and investment flows between borders, and access to thelatest energy efficient products and cutting edge technology, all of

90 384 228 1519.erleo@gmail.com (A. Aslan),nevsehir.edu.tr (M. Topcu).

et al., Banking development0.1016/j.energy.2014.05.061

which can affect the demand for energy by increasing consumptionand business fixed investment.”. Theoretical explanation betweenthese two variables is then categorized into three lines by Çobanand Topcu [12]. First, the direct effect channel implies that de-velopments in financial systems lead individuals to borrow cheaperin order to buy durable goods whose production requires higherenergy levels. Second, the business effect channel points out thatcertain improvements in the financial infrastructure of the econ-omy assist businesses in accessing financial capital less costly, thus,leading to increases in energy uses. Finally, thewealth effect channelindicates that expanded stock market operations may enhanceconsumer confidence which then potentially promote economicactivity and energy demand.

The contribution of this paper to the literature is two-fold. First,the relationship between finance and energy has been studied by agreat numberof authors (see, literature review)butmostof themuseonly domestic credit allocated to private sector as a proxy offinancialdevelopment [13e21]. Apart from Coban and Topcu [12] and Tangand Tan [22] that construct a single variable using various indicators,there exist very limited papers using more than three bank-relatedvariables. In existing paper it is measured how volatile the impactof banking sector development is among different indicators.

and energy consumption: Evidence from a panel of Middle Eastern

A. Aslan et al. / Energy xxx (2014) 1e72

Second, the Middle East is a remarkable region of the world tostudy in the area of energy economics due to the experienced rapidrise of the region's energy use. International Energy Outlook [23]recently released by the Energy Information Administration pro-jects that energy use worldwide is expected to grow by 56% over theperiod 2010e2040 while the International Energy Agency [24] re-ports that the Middle East, in particular, is expected to perform thegreatest rise in energy use during the period 2006e2030, followingby China and India. Although there are some empirical papers thathave explored thenexusbetweenenergyconsumptionandeconomicgrowth [25e27] as well as the association between financial devel-opmentandeconomicgrowth [28e30] in the region, to thebestofourknowledge, there is not anyempirical paper related to the associationbetween financial development and energy consumption per se.

The purpose of this study is to investigate the relationship be-tween banking development and energy consumption for a panelof seven Middle Eastern countries using panel cointegration andcausality methodologies. The remaining of the paper is structuredas follows: Section 2 reviews the relevant literature, while Section 3describes both the econometric model and data used. Section 4presents the methodological approach as well as the empiricalfindings. Section 5 discusses the empirical results and, finally,Section 6 concludes.

2. Literature review

In spite of the well-documented literature on the financialdevelopment-economic growth hypothesis [30e32] as well as onthe economic growth-energy consumption nexus [33e35] for bothdeveloped and emerging countries, the relationship betweenfinancial development and energy consumption has grown steadilyover the last years.

The literature generally expands on single country-case studies.In particular, China is seen as the attractive country in the literature.Shahbaz et al. [19] investigate the nexus between economic growthand energy consumption byconsidering as specific control variablesa number of financial development measures, international tradeand capital explicitly into the production function. The ARDL(autoregressive distributed lag) bound testing approach for coin-tegration results over the period 1971e2011 reveals the presence ofa long-run association among the variables. In addition, a bi-directional causality is also detected between energy consumptionand financial development. Jalil and Feridun [36] investigate theimpact of financial development, economic growth and energyconsumption on the environmental pollution in China spanning theperiod 1953e2006, using the ARDL procedure. They document thatfinancial development leads to reduced environmental pollutionmeasures. With a panel data set on 29 Chinese provinces, Xu [37]investigates the dynamic relationship between financial develop-ment and energy consumption over the period 1999e2009. System-GMM (general methods of moments) results document the pres-ence of a positive significant relationship between financial devel-opment and energy consumption when financial development ismeasured by the ratio of loans in financial institutions to GDP (GrossDomestic Product) as well as by the ratio of FDI (foreign direct in-vestments) to GDP.

In the case of Malaysia, Islam et al. [18] investigate the rela-tionship among energy consumption, aggregate production,financial development and population over the period 1971e2009,through the methodology of a VEC (vector error correction) model.Their empirical results highlight that financial development affectsenergy demand both in the short- and the long-run. Tang and Tan[22] analyze the nexus among economic growth, relative price,foreign direct investment, financial development and energy con-sumption. Both cointegration and causality analysis, spanning the

Please cite this article in press as: Aslan A, et al., Banking developmentcountries, Energy (2014), http://dx.doi.org/10.1016/j.energy.2014.05.061

period to 2009, suggest that energy consumption and financialdevelopment are correlated in the long run, while energy con-sumption causes financial development.

In the Tunisian context, Chtioui [16] examines the relationshipamong financial development, economic growth and energy con-sumption over the period 1972e2010, using both the cointegrationand error correction methodology. His empirical findings point out aunidirectional causality running from energy consumption to finan-cial development both in the short- and in the long-run. Theseempiricalfindingsarenotexactly similar to those reachedbyShahbazand Lean [17]who investigate the nexus amongenergyconsumption,economic growth, financial development, industrialization and ur-banization in Tunisia over the period 1971e2008 and provide evi-dence in favor of the presence of a long-run relationship among thevariables, while a bi-directional causality between financial devel-opment and energy consumption is also detected.

In the case of Indonesia, Shahbaz et al. [20] examine the rela-tionship among economic growth, energy consumption, financialdevelopment, trade openness and CO2 emissions over the period1975e2011. Using the ARDL bound testing approach for cointe-gration and the VECM (vector error correction model) Grangercausality methodological approach they find that these variablesare cointegrated, while financial development Granger causes en-ergy consumption. In a study for South Africa, Shahbaz et al. [21]find that financial development reduces energy emissions, whilecoal consumption significantly deteriorates the environmentalquality. €Oztürk and Acaravci [14] examine the causal relationshipbetween financial development, trade, economic growth, energyconsumption and carbon emissions in Turkey over the period of1960e2007. Cointegration results reveal the presence of a long runrelationship between per capita energy consumption and financialdevelopment. Furthermore, it is also found that financial develop-ment causes per capita energy consumption in the short run, whileno relation is established between the two variables in the long run.Mehrara and Musai [13] examine the relationship between eco-nomic growth and energy consumption by incorporating financialdevelopment into a neoclassical production function in the case ofIran over the period 1970e2009. Their results document that thevariables under study are cointegrated. Kakar et al. [38] examinethe association among economic growth, financial developmentand energy consumption in Pakistan over the period 1980e2009.Cointegration and error correction results highlight that financialdevelopment affects energy consumption in the long run, while astatistically significant association does not exist in the short-run.

Even though the implications of panel case studies providemorecomprehensive policy implications, the numbers of such studiesthat cover country groups are relatively limited. In particular, Çobanand Topcu [12] investigate the relationship between energy con-sumption and financial development across EU (European Union)countries using the GMM (Generalized Method of Moments)methodological approach over the period 1990e2011. They findthat in the case of the old members, higher financial developmentlevels lead to higher energy consumption, regardless of whetherfinancial development stems from the banking sector or the stockmarket. In the case of the new members, however, they concludethat the impact of financial development depends on how financialdevelopment is measured. Al-Mulali and Lee [15] examine theimpact of financial development on energy consumption in the GCC(gulf cooperation council) countries over the period 1980e2009.Their results show that the variables are cointegrated, while theirdynamic panel OLS (ordinary least squares) results imply thatfinancial development has a long-run positive impact on energyconsumption; at the same time, unidirectional causality is detectedrunning from financial development to energy consumption. Al-Mulali and Sab [39] employ a panel model over the period

and energy consumption: Evidence from a panel of Middle Eastern

A. Aslan et al. / Energy xxx (2014) 1e7 3

1980e2008 to investigate the impact of energy consumption on theeconomic and financial development in 19 countries. They find thatenergy consumption enables selected countries to achieve higheconomic and financial development levels. Al-Mulali and Sab [40]examine the impact of energy consumption and CO2 emission onboth GDP growth and the financial development across 30 Sub-Saharan African countries, using a panel model. They documentthat energy consumption plays an important role to increasefinancial development in the Sub-Saharan African countries overthe period 1980e2008. Sadorsky [11] examines the impact offinancial development on energy use on nine frontier CEE (Centraland East Europe) economies over the period 1996e2006, usingGMM estimation methodologies. Dividing financial developmentindicators into two parts, he finds that the impact of financialdevelopment is significantly positive when financial developmentis measured through bank related variables. By contrast, mea-surements through stock market variables reveal that only thestock market turnover has a significant positive impact on energyconsumption. Sadorsky [10] studies the impact of financial devel-opment on energy consumption in 22 emerging economies by us-ing various financial development indicators over the period1990e2006. GMM estimation results show that financial develop-ment affects energy consumption positively when financial devel-opment is measured using stock market variables.

3. The empirical model and the data set

Considering previous studies on the energy consumption-financial development nexus [10e12], we model ec (energy con-sumption) as a function of income (y), ep (energy prices) and bs(banking sector) development.

ecit ¼ ai1yitþ a2iepitþ a3ibsitþ εit (1)

where i ¼ 1, …, N denotes the countries involved, while t ¼ 1, …, Tdenotes the time period. The panel data set is a balanced panel ofseven Middle East countries spanning the period 1980e2011 anddata on energy consumption (ec), income (y), energy prices (ep),and a number of banking sector indicators (bs) are obtained. TheMiddle East countries included in the sample are: Bahrain, Iran,Israel, Jordan, Kuwait, Saudi Arabia and Syria. The dimensions of thepanel data set are selected to include as many countries as possibleeach with a reasonable time length of observations.

Data of energy consumption are measured as energy use in kg ofoil equivalent per capita, while real GDP per capita is measured atconstant 2005 US dollars. As energy prices are not easily available,energy price data are proxied by dividing Dubai crude oil prices,measured in US dollars per barrel, to each country's consumerprices index, with the year 2005 being the base year. The data ofthese variables, except for Dubai crude oil, are obtained from theWorld Bank World Development Indicators [41] database, whileDubai crude oil prices are available from the British Petroleum's2012 Statistical Review of World Energy [42].

Although there are numerous financial development indicators,the data for the full period between 1980 and 2011 for our panel ofcountries sample are only available for some prominent indicators.1

To our research goals, we consider the following four banking sectordevelopment indicators: the ratio of dba (deposit money bank as-sets) to GDP, the ratio of fd (financial system deposits) to GDP, the

1 Several papers focus on the impact of certain financial development measureson the development of the financial sector through banking and stock marketimprovements [10,11,12,43,44]. The current paper, however, considers only de-velopments stemming from the banking sector since data on stock market in-dicators for the majority of Middle East countries are commonly unavailable.

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ratio of liquid liabilities to GDP (ll), and the ratio of pcdmb (privatecredit by deposit money banks) and other financial institutions toGDP. The data are obtained from theWorld Bank Financial StructureDatabase. A preliminary visual inspection in Fig. 1 highlights theclose association between energy consumption and the four alter-native financial development indexes. Once chosen banking sectorindicators are employed, we get the extended version of Eq (1)below, which will be used in the quantitative empirical investiga-tion. This augmented form (Eq (2)) is formulized as follows:

ecit ¼ bi1yitþ b2iepitþ b3idbaitþ b4ifditþ b5illit

þ b6ipcdmbitþ εit (2)

4. Methodology and empirical results

4.1. Panel unit root tests

Thereare avarietyofpanel unit root tests,which includeLevinandLin [45], Harris and Tzavalis [46],Maddala andWu [47], Breitung [48]and Handri [49]. The results in Table 1 point out that the hypothesisthat the levels of both variables under study contain a unit root isaccepted at the 1% significant level. The results remain consistentacross all of these tests. When these tests are applied on the firstdifferences of those variables, the reported results display that theunit root hypothesis is rejected. By contrast, only in the case of theHandri [47] test, the null of stationarity is rejected for both variables.

4.2. Heterogeneity tests

We follow closely the test suggested by Pesaran and Yamagata[50] who follow the two-step procedure and first, we run a regres-sion of log energy consumption on the logs of income, energy pricesand the four indexes of financial development. The residuals fromthis regression, which we denote by e, are then used in the secondstage to estimate dynamics of energy consumption. Specifically:

eit ¼ ai þ leit�1 þ siðeÞ,εit (3)

where within each country l is assumed to be homogeneous. Ourinterest is to test the hypothesis that l ¼ li across all i in e. The testresults are given in Table 2. The D statistic and the associatedbootstrapped p value leads to strong rejections of the homogeneityhypothesis. In other words, the empirical findings indicate that therelationships under investigation are characterized by heteroge-neity of dynamics, supporting the employment of panel analysis.

4.3. Panel cointegration

Given the presence of heterogeneity in both dynamics and errorvariances in the panel, the heterogeneous panel cointegration testadvanced by Pedroni [51,52], which allows for cross-section inter-dependencewith different individual effects, is employed. Based onthe twomodel specifications presented above, Table 3 reports panelcointegration test statistics. All seven test statistics reject the nullhypothesis of no cointegration at the one percent significance level.

Having established cointegration, we estimate the long-runmodel using the FMOLS methodology. The estimated impact of in-come is, as expected, positive (0.432), of energy prices is negative(�0.209), the ratio of deposit money bank assets to GDP is positive(0.355), the ratio of financial system deposits to GDP is positive(0.190), the ratio of liquid liabilities to GDP is positive (0.396), and theratio of private credit by deposit money banks and other financialinstitutions to GDP is positive (0.169), while they are all statisticallysignificant at the 1% level. In other words, since all variables are

and energy consumption: Evidence from a panel of Middle Eastern

Fig. 1. Energy Consumption and Financial Development Indexes.

A. Aslan et al. / Energy xxx (2014) 1e74

measured in logs, a 1% increase; in ldba leads to a 0.36% increase inenergy consumption; in lfd leads to a 0.19% increase in energy con-sumption; in lll leads to 0.40% increase in energy consumption; andin lpcdmb leads to a 0.17% increase in energy consumption.

lec ¼ 0:432ly� 0:209lepþ 0:355ldbaþ 0:190lfdþ 0:396ll

þ 0:169lpcdmb (4)

ð4:62Þ� ð � 4:22Þ� ð9:73Þ� ð4:91Þ� ð4:38Þ� ð5:94Þ�R2 ¼ 0.81. Figures in parentheses denote t-statistics, while an

asterisk denotes statistical significance at 1%.

4.4. Causality results

Having already found a long-run equilibrium, we are alsointerested in examining the direction of causality across the vari-ables under study. Following Pesaran et al. [53], a panel vector errorcorrection model is estimated to infer the causal dynamics. TheEngle-Granger [54] two-step procedure is employed by first esti-mating the long-run model specified in Eq (2) to generate theestimated residuals, with the lagged values serving as the errorcorrection term in the estimation of the dynamic error correctionmodel. The results are reported in Table 4. EquationDec reveals thatincome, energy prices and more importantly the four financialdevelopment indexes, each have a statistically significant impact onenergy consumption in the short-run. In terms of Equation Dy forenergy consumption, energy prices and the four financial devel-opment indexes have a statistically significant impact on incomegrowth in the short-run. With respect to Equation Dep for energyprices, all, except the ratio of financial system deposits to GDP in-dex, each has a statistically significant impact. In terms of EquationDdba, only three variables seem to exert causality on Ddba, that is,income, the ratio of deposit money bank assets to GDP index andthe ratio of private credit by deposit money banks and otherfinancial institutions to GDP index, each having a statistically sig-nificant impact, whereas the remaining variables are statisticallyinsignificant. In terms of the Dfd equation, only income seems toprovide causality information for this particular financial devel-opment index. The same results seem to hold for the Dll equation,with the exception that the ratio of private credit by deposit money

Please cite this article in press as: Aslan A, et al., Banking developmentcountries, Energy (2014), http://dx.doi.org/10.1016/j.energy.2014.05.061

banks and other financial institutions to GDP index provides cau-sality information for the ratio of liquid liabilities to GDP in theshort-run. Finally, in terms of the ratio of private credit by depositmoney banks and other financial institutions to GDP equation, onlyincome seems to cause this particular financial development index.

Overall and focusing on the primary of interest equation Dec (i.e.,the energy consumption equation), the causality results clearlydemonstrate that all four alternative financial development indexesprovide a substantial information content for thedynamics of energyconsumption, yielding strong empirical support to the hypothesisthat the level offinancial development is considered as an importantfactor for the level of energy consumption, probably through thesupport it provides to the growth plan that countries plan to achieve.

Based on the statistical significance of the respective errorcorrection terms in the aboveequations, all variables seemto respondto deviations from long-run equilibrium. Given themagnitude of thecoefficients of the error correction terms, the speed of adjustmenttowards long-runequilibriumis rather slow,with theexceptionof theterm in the energy consumption equation. The negative sign of theestimated speed of the adjustment coefficient is in accordance withthe convergence process toward long-run equilibrium.

5. Discussions and policy implications

The empirical results presented in the previous section can beutilized for energy-oriented policy analysis across the panel ofMiddle East countries under study and onemay also expect that theentire region shows similarities with the implications of the rele-vant countries. Furthermore, comparing the results of this studywith those provided in the relevant literature could assist policy-makers to fully understand where the Middle East countries standout and to develop appropriate energy strategies.

Evidence from cointegration analysis provides consistent resultswith thoseprovidedby the relevant literature. As foundby thebulkofthe literature, the results indicate a long-run relationship among thevariables in question. FMOLS results verify the theoretical expecta-tions based upon Eq (2). The highest explanatory impact on energyconsumption in the long-runproceeds fromthe incomevariable. Thisevidence is simply rational, given the expectations that energy de-mand rises with increases in income. A 1% increase in energy pricesdecreases energyconsumption by 0.21% and this is compatiblewith adownward sloping energy consumption demand curve. The

and energy consumption: Evidence from a panel of Middle Eastern

A. Aslan et al. / Energy xxx (2014) 1e7 5

coefficients of these two variables imply that the positive impact ofincomeonenergyconsumption is two timeshigher than thenegativeimpactofenergyprices in the long-run.Thisfinding is consistentwiththe resultsof Sadorsky [55] for the caseof thepanel of theMiddleEastcountries. Themain focusonthe results reported inEq (4)hasbeenonfinancial development indicators. All financial development in-dicators employed in this paper affect energy consumptionpositivelyin the long-run, while their impact range falls between 0.169 and0.396. These results highlight that the banking sector's expansionsupports energy consumption in the long-run, regardless of whichbank-related variables are employed.Moreover, deposit money bankassets toGDPand liquid liabilities as a share toGDPare both shown toexert a strong impact on energy consumption vis-�a-vis the other twofinancial development indicators. According to King and Levine [56],the intuition behind the role of the former indicator is that banks aremore likely to provide risk sharing and information services, while interms of the ratio of deposit money bank assets to GDP, this ratioreflects an extensive use of currency outside the banking systemrather than an increase in bank deposits. This measure appears to beless indicative of thefinancial dealings and transactionof the bankingsystem [57]. In terms of the liquid liabilities to GDP ratio, the findingsdemonstrate the importance of overall financial services and thestrength of the banking system in a country. Thus, the ratio capturesthe liquidity provision in the economy, which is an importantdeterminant of growth [58,59]. Given the strength of banking de-velopments, any expansion coming from this sector will furtherfacilitate loans provision which, in turn, will encourage consumersand businesses to increase their purchases of durable goods and in-vestment capital, respectively. Both positive actions are expected tofoster higher economic growth, which leads to a higher demand forenergy consumption. In addition, the results reflect that larger valuesof bank related variables increase energy use in the Middle Eastcountries more than the Central and East European countries, asindicated by Sadorsky [11].

Another finding regarding FMOLS results is that the long-runimpacts of all banking sector indicators on energy use are not ashigh as income does. This is not consistent with the results by Al-Mulali and Lee [15] which might be explained from measurementissuesas theyonlyusedomestic credit toprivate sectorasan indicatorof financial development in the Middle East countries. On the otherhand, the long-run impact of banking system developments on en-ergy demand is higher than that of energy prices, once bankingexpansion is measured by the ratio of deposit money bank assets toGDP as well as the ratio of liquid liabilities to GDP. This occurs inrelevance to the analysis above and given the superiority of theseparticular indicators of financial developments. Furthermore, sincemore than 55% of global oil reserves are in with the Middle Eastcountries, these oil reserves are offered to these countries at differentpricesvis-�a-vis theprices the restof theworldpays. Therefore, energydemand is less sensitive to changes in oil prices in these economies,while theoverall strengthof thefinancial systemdepicts thepotentialrole of economic growth to support such energy demand changes.

Granger causality test results suggest a feedback associationamong all variables in the long-run through the error correctionmechanism. In particular, the bidirectional relationship betweenfinancial development and energy consumption is similar to thatprovided by Al-Mulali and Lee [15] andAl-Mulali and Sab [40] for thecase of GCC and Sub-Saharan African countries, respectively. But thisfinding is a little contradictory with that by Al-Mulali and Sab [39]where bidirectional causality is not established in the case of 19selected countries once financial development is measured usingbroad money supply and, thus, they do not support the findings byNarayan and Smyth [27]who report unidirectional causality runningfrom electricity consumption to GDP. In the short-run, a feedbackrelation, implying bidirectional causality between energy

Please cite this article in press as: Aslan A, et al., Banking developmentcountries, Energy (2014), http://dx.doi.org/10.1016/j.energy.2014.05.061

consumption and income, supports both the energy-led-growth andthe growth-led-energy hypotheses. In the case of the Middle East,while this is consistent to the results by Omri [60], it providesinconsistent results with the results provided by €Ozcan [25] whoreports only the presence of the growth-led-energy hypothesis.Bidirectional causality is also detected between each of the bankingsector development indicators and income, which supports thefinance-led-growth and the growth-led finance hypotheses. Oncethe finance-growth literature is reviewed, we can see that thisfinding is not only fairly similar to Hassan et al. [61], but it also pro-vides similarities with those by Kar et al. [30] in the case of a numberof Middle East countries and for the case of a few financial devel-opment indicators. The causality runs from banking expansion toenergy consumption, providing support to the finance-led-energyhypothesis.

Overall, the findings prove that banking expansion plays a vitalrole in increasing energy demand in the panel of Middle Eastcountries studied in the paper. This addresses that financialdevelopment leads individuals to borrow cheaper. Easy credit fa-cilitates the purchasing of durable goods; and, thus, promotes en-ergy demand. The findings are in line with the bulk of the literature[10,11,15,17,39,40]. The implications emerged clearly point out thatpolicymakers in Middle East countries should target to improvetheir energy efficiency. Similarly with the case of new EU countries,suggested by Çoban and Topcu [12], limited banking expansion inthese countries leads them not to access the technology whichprovides energy efficiency due to high costs. Thus, policymakers inthe region should encourage energy saving projects in the regionand, thus, they may help to control greenhouse gas emissions.

Policy implications depending on causality results provide usefulyields as well. Short-run results suggest that the policy of conservingenergy consumption may be implemented with little or no adverseimpact on financial development. €Oztürk [62] highlights that con-servation hypothesis seems reasonable only if the country in ques-tion, the region itself here, is less energy dependent. On the otherhand, the interdependence in the long-run indicates that energyconservation policiesmight become detrimental to the developmentoffinancial sector.Hence, policymakers shouldrealize this split beforedeveloping an appropriate energy policy and assess accordingly.

6. Conclusions

The goal of this study is to investigate the relationship betweenbanking sector developments and energy consumption in theMiddle East, given the importance of energy in the region. Coin-tegration and causality approaches were adopted for a panel ofseven Middle East countries using annual observations over theperiod 1980e2011. Cointegration results indicate the existence ofa long-run equilibrium between energy consumption, income,energy prices and banking sector development indicators. Inaddition, long-run elasticities estimated from FMOLS show that a1% increase in i) deposit money bank assets increases energyconsumption by 0.36%; (ii) financial system deposits increasesenergy consumption by 0.19%; (iii) liquid liabilities increases en-ergy consumption by 0.40%; and (iv) private credit by depositmoney banks and other financial institutions increases energyconsumption by 0.17%. These results prove that the impact thatbanking sector development on energy consumption seems vol-atile across four different measures of banking sector develop-ment. In terms of the relevance of predictors based on energydemand in the long-run, it is observed that income predicts re-gion's energy demand better than the energy prices. In otherwords, an increase in per capita income has a larger impact onenergy consumption than does a decrease in energy prices. Whenit comes to causality, short-run results imply that causality runs

and energy consumption: Evidence from a panel of Middle Eastern

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A. Aslan et al. / Energy xxx (2014) 1e76

from banking sector developments to energy consumption in theMiddle East, which addresses the validity of the finance-led-energy hypothesis, assuming that the banking sector is thesource of financial development. Long-run causality results,however, display a bidirectional feedback relation.

Policy implications suggested by this paper should be useful forpolicymakers in the region if noticed carefully. As banking expan-sion plays a vital role in increasing energy demand, policymakersshould target to improve their energy efficiency. While energyconservation policies may not be harmful on banking sector in theshort-run, it turns out to leave a detrimental impact in the long-run. Therefore, policymakers in these countries should achieve towalk this fine line successfully.

This study opens new venues for researchers to test whether theempirical findings remain consistent when more countries fromthe region are included into the analysis. Moreover, even it is hardto collect data for the majority of the Middle East countries, de-velopments stemming from stock market activities could furtherassist to generate more meaningful outcomes.

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3)][0.75]

(�0.19

7)][0.24]

ctivesh

ort-run.c

Appendix

Table 2Homogeneity tests.

D test 39.53Bias-corrected bootstrap p-value [0.00]

Table 3Panel cointegration tests.

Dimension Test Stat.

Within dimension Panel v-stat 48.92788a

Panel r-stat �40.67038a

Panel pp-stat �44.07139a

Panel ADF-stat �8.78277a

Between dimension Group r-stat �40.10389a

Group pp-stat �45.57062a

Group ADF-stat. �8.51411a

a denotes statistical significance at 1%.

Table 1Panel unit root tests.

Variables LL Han (hom) Han (het) F-ADF F-PP HT Breit

lec �1.14 28.32a 26.53a 13.67 14.45 �1.64 �0.55Dlec �5.84a 1.85 1.36 110.35a 113.87a �7.74a �3.87a

Ly �1.26 36.54a 36.34a 16.97 15.18 �1.43 �1.37Dly �6.63a 1.32 1.53 132.47a 130.96a �6.68a �5.66a

lep �1.19 28.51a 28.57a 13.67 14.48 �1.53 �0.47Dlep �5.48a 1.81 1.26 117.34a 110.82a �7.15a �3.93a

Ldba �1.23 38.28a 36.34a 18.93 12.15 �1.46 �1.16Ddba �6.84a 1.32 1.53 130.16a 132.98a �6.58a �5.68alfd �1.24 25.49a 24.48a 12.65 14.49 �1.47 �0.61Dlfd �5.29a 1.80 1.34 112.39a 111.80a �7.82a �3.80a

lll �1.21 42.55a 39.36a 16.57 17.15 �1.43 �1.14Dlll �6.15a 1.30 1.54 131.15a 132.84a �6.42a �5.95a

lpcdmb �1.23 27.38a 24.57a 13.69 18.44 �1.61 �0.72Dlpcdmb �5.61a 1.19 1.32 119.08a 126.87a �7.85a �3.97a

Notes: D denotes first differences. LL denotes the Levin and Lin test, Han denotes theHandri test, F-ADF and F-PP denotes theMaddala andWu test, HT denotes the Harrisand Tzavalis test, Breit denotes the Breitung test, ADF is the Augmented Dick-eyeFuller test and PP is the PhillipsePerron test. l¼ denotes variables in logarithms,ec¼ energy consumption, y¼ income, ep¼ energy prices, dba¼ the ratio of depositmoney bank assets to GDP, fd¼ the ratio of financial system deposits to GDP, ll¼ theratio of liquid liabilities to GDP, and pcdmb ¼ the ratio of private credit by depositmoney banks and other financial institutions to GDP.

a denotes statistical significance at 1%.

Table

4Pa

nel

causalitytests.

Dep

enden

tva

riab

leSo

urces

ofcausation

(indep

enden

tva

riab

les)

Shorte

run

Dec

Dy

Dep

Ddba

Dfd

Equa

tion

Dec

Dec

e25

.14(0.206

)24

.21(�

0.21

7)37

.22(0.382

)30

.91

[0.00]

[0.00]

[0.00]

[0.00]

[0.00]

[0.00]

[0.00

Equa

tion

Dy

Dy

19.59(0.055

)e

27.74(�

0.04

6)56

.57(0.168

)52

.55

[0.00]

[0.00]

[0.00]

[0.00]

[0.00]

[0.00]

[0.00

Equa

tion

Dep

Dep

58.82(0.249

)43

.53(0.352

)e

82.78(0.053

)0.08

[0.00]

[0.00]

[0.00]

[0.00]

[0.00]

[0.00]

[0.79

Equa

tion

Ddb

aDdba

0.07

4(0.035

)30

.79(0.306

)2.67

(�0.08

9)e

0.37

[0.71]

[0.78]

[0.00]

[0.00]

[0.12]

[0.11]

[0.58

Equa

tion

Dfd

Dfd

0.11

0(�

0.01

5)45

.32(0.051

)0.86

(0.018

)1.48

(0.010

)e

[0.78]

[0.74]

[0.00]

[0.00]

[0.40]

[0.36]

[0.29]

[0.23]

Equa

tion

Dll

Dll

0.21

0(0.049

)29

.74(0.253

)1.15

(�0.04

9)0.29

(�0.03

4)0.09

8[0.68]

[0.65]

[0.00]

[0.00]

[0.34]

[0.28]

[0.88]

[0.86]

[0.79

Equa

tion

Dpcdm

bDpcd

mb

0.35

0(0.028

)24

.56(0.093

)0.68

(�0.01

6)0.12

(0.029

)1.37

[0.60]

[0.56]

[0.00]

[0.00]

[0.46]

[0.41]

[0.77]

[0.73]

[0.30

Notes:W

aldF-testsreportedwithresp

ectto

short-runch

ange

sin

theindep

enden

tva

riab

les.Th

esu

mof

thelagg

edco

efficien

tsfortheresp

etheerrorco

rrection

term

,while

values

inbracke

tsden

otep-va

lues.

Please cite this article in press as: Aslan A, et al., Banking development and energy consumption: Evidence from a panel of Middle Easterncountries, Energy (2014), http://dx.doi.org/10.1016/j.energy.2014.05.061

A. Aslan et al. / Energy xxx (2014) 1e7 7

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