Asymmetric analysis of the effect of energy consumption and financial development on economic growth in Iran: Application of nonlinear ARDL method

Economic growth is one of the main goals of every country's economic policy. In recent years, the relationship between the development of the financial sector and energy consumption on economic growth has been the focus of many economists, but their relationship has never been a consensus among economic thinkers. The aim of this study is to explain the relationship between economic growth, energy consumption and development. Therefore, in this study, asymmetric analysis of the effects of energy consumption and financial development on Iran's economic growth is examined using a non-linear distribution interrupt (NARDL) self-regression model. The nonlinear and asymmetric relationship of energy consumption and financial development and economic growth has not been done together in Iran due to the fact that the positive or negative changes of one variable do not have similar effects on the other variable. This article aims to show the nonlinear relationships of these variables in the period between 1979 to 2017. Two different indicators were used for the variable of financial development (domestic credit to the private sector to GDP and liquidity to the private sector to GDP). The per capita energy consumption used in this study is the consumption of a variety of renewable and non-renewable resources divided by the population of a country, which is equivalent to a kilo ton of crude oil. The most important factors influencing economic growth have been labor and capital. In fact, labor and capital require intermediaries to use energy, and energy indirectly affects economic growth through its impact on labor and capital. The results show that the positive shock of energy consumption in the long run has a negative and significant effect on economic growth in a way that in the long run saving energy consumption has a negative and significant effect on economic growth. Negative shocks to financial development also have a long-term negative and significant effect on economic growth. This negative impact can be attributed to improper liberalization of financial markets, weak financial system, and incoherent financial market that has led to a reduction in investment through the misallocation of resources. On the other hand, the  increasing credit granted to the private sector, which is invested in unproductive work, has resulted in the weakness of this sector. The financial sector of Iran has been passive and has not been able to play an effective role in the process of economic growth. Therefore, the improvement and development of the financial sector is essential in order to activate the function of this sector in the process of economic growth and the optimal allocation of financial resources resulting from oil revenues. In addition, long-term capital has little effect on economic growth, and labor has a negative effect on economic growth, indicating that labor reduces consumption and investment activities. On the other hand, the negative shock of energy consumption reduces economic growth, albeit rather insignificantly. Also, the negative shock in financial development is negatively and significantly related to economic growth, and this negative effect is due to improper liberalization of the financial markets, the weakness of the financial system, and the lack of a coherently regulated financial market, which has led to a reduction in investment through the misallocation of resources. The labor force has a negative and significant effect on economic growth. The diagnostic tests examined in this study reveal that the tests are approved, and finally the results of the tests for the stability of the estimated coefficients and the stability test for short-term and long-term coefficients show the stability of the coefficients and validity and reliability at a significant level of 5%.