Olfa Kaabia

This paper examines the relationship between financial development and energy consumption estimations in the major MENA countries (Algeria, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi, Arabia, Syria, Tunisia, United Arab Emirates and Yemen) over the period 1996 to 2014. We consider the energy use in kg of oil equivalent per capita as a dependent variable that reflects the cross-country energy consumption. We measure the level of financial development in the MENA countries by considering banking indicators. Our study differs from past ones in that we investigate the determinants of energy demand considering the heterogeneity, nonlinearity and asymmetry. We extend the model of Sadorsky (2011) by estimating both linear and non-linear dynamic panel process. Our results show a positive and statistically significant relationship between the intermediation capacity of the banking system as well as its size and energy consumption. However, this relationship is non-monotonous. Above a critical threshold, the effect of financial development on energy consumption becomes negative. It seems that financial development only promotes energy demand to a certain extent because of its non-linear inverted U-shaped impact on GDP.
Keywords: Energy consumption, Financial Development, MENA Region, Dynamic panel