The role of financial development in the relationship between energy consumption and economic growth in Iran

The purpose of this study is to investigate the role of financial development in the relationship between energy consumption and economic growth in Iran using the autoregressive distributed lag (ARDL) approach and data for the period 1361-1396. To this end, several indices of financial development have been aggregated into an overall (combined) index, using the principal component analysis method. The results of the cointegration analysis show that energy consumption has a positive and significant effect on economic growth in the long run. Also, the effect of the interaction between financial development and energy consumption on economic growth is positive and statistically significant, which indicates that the effect of energy consumption on economic growth is not independent of the level of financial development; such that as financial development improves, the positive relationship between economic growth and energy consumption becomes stronger. In this regard, financial development, as a catalyst for modern technological progress, can effectively promote the improvement of energy efficiency. Accordingly, the higher the level of financial development, a unit increase in energy consumption leads to a greater increase in economic growth. In other words, financial development can intensify the positive growth effects of energy consumption. On the other hand, the empirical results show that an increase in the share of foreign trade in GDP enhances economic growth, while the effect of inflation on economic growth is negative.