Effect of financial sector development on energy consumption in Africa: Is it threshold specific?

摘要

The relationship between financial development and energy consumption has not received much attention in theoretical and empirical literature. The scanty literature on the subject appears to exclude Africa while exacerbating the gap is probably no attempt to examine whether or not there exist nonlinearity in the relationship. This study reexamined the threshold effects of financial sector development on energy consumption in Africa by positing that whether finance promotes or inhibits energy consumption depends on a certain threshold of finance. Relying on an annual panel data for 45 countries in Africa covering 1973-2017, the study investigated the threshold effects of finance on energy consumption by employing Hansen sample splitting and threshold estimation technique. The results revealed evidence of threshold effect of finance on energy consumption for the continent suggesting that the impact of finance on energy consumption is threshold specific given the various indicators of finance. The main finding is that financial development generally promotes energy consumption in Africa but the impact is higher when they are below the threshold while the effect diminishes and eventually turn to inhibit energy consumption when they are above the threshold. Trade openness and inflation, however, inhibit energy consumption. This study provides member countries with well-informed level of their exposure to energy consumption. While increase in financial sector development motivated by other higher factors such as economic growth, inflation, and trade openness can be linked to higher energy consumption, higher finance driven by well-functioning regulatory institutions may potentially reduce energy consumption.