The Relationship between Energy Consumption and Financial Development in Iran

Energy، as an important factor of production and final product، has a special role in the economic growth and development of any country. Financial development is also recognized as a factor that can influence economic growth and energy consumption. In this paper we investigate the short and long run causal relations amongst energy consumption، financial development، GDP per capita and urban population in Iran، for the period 1971-2008 based on Autoregressive Distributed Lag (ARDL) bounds testing approach of co integration and Vector Error-Correction Models. In order to test for structural breaks in the time series data we use the Zivot Andrews unit root test. The results indicated that all variables meet the initial condition for the ARDL model. The result of F-test and Gregory- Hansen cointegration test confirmed the existence of a long term relationship between the considered variables. The ARDL long- term results suggest a positive effect of financial development، GDP per capita and urban population on energy consumption over the study period. Causality test results indicate that there is bi-directional causality between financial development and energy consumption as well as urban population and energy consumption in the long-term. There is also a unidirectional causal relationship from GDP per capita to energy consumption in the long and short -term.