Effects of financial sector development on energy consumption in Africa

Abstract

The relationship between energy consumption and financial sector development can be quite complex owing to the numerous impact channels that exist between them. Thus, examining how positive and negative variations of financial sector development can affect energy consumption is very important. While studies on finance–energy consumption nexus exists albeit insignificantly, those pertaining to Africa are almost non–existent. This study examines the effect of financial sector development on energy consumption in Africa relying on data for 45 countries covering a period of 1973–2014. Results from the generalized method of moment (GMM) reveal that whereas domestic credit appears to propel energy consumption irrespective of the model specification, private credit only spurs energy consumption when energy consumption is proxied by energy use. The study also found U–shaped relationship between private credit and energy consumption proxied by carbon dioxide (CO2) emissions. The study discusses the key implications for policy.