Energy Consumption and Financial Development in NAFTA Countries, 1971–2015

Abstract

To satisfy human needs and desires, it is necessary to produce goods and services that require the use of some production factors, such as labor, capital, and energy, among others. Nowadays, energy is a key production factor for economic activity in all countries. The main objective of this paper is to analyze the relationship between energy, economic growth, urbanization, and financial development in the country-members of the North American Free Trade Agreement (NAFTA) during the period of 1971-2015. Panel data Econometric methods are applied in this research, namely cross-section dependence (Pesaran test), unit root (Cross-sectional Augmented Dickey Fuller and Cross-sectional Im, Pesaran, and Shin tests), cointegration (Kao and Fisher-Johansen tests), and heterogeneous causality (Hurlin and Dumitrescu test). The results achieved in this research demonstrate that the variables of this model are characterized by a cross-section dependence, and they are integrated in order one. An equilibrium or long-term relationship between them exists. By means of the Fully Modified OLS and Dynamic OLS estimators it this demonstrated that there is a positive relationship between GDP and EC, while there is a negative relationship between FD, CPI, URB, and TO and EC. The economic policy recommendations drawn from this investigation are that financial development promotion, urbanization, and trade openness may contribute to reducing energy consumption in these countries. Appl. Sci. 2019, 9, 302 2 of 11 transparency among borrowers and lenders, fosters greater flows of financial capital and investment, and facilitates access to more efficient energy products, among other things, which can affect the demand for energy by increasing consumption and business investments [3,4]. Financial development affects the demand for energy through the following: (a) it allows consumers to access easier and cheaper loans of money to buy durable goods, such as cars, houses, refrigerators, washing machines, etc., which are large energy consumers that can affect the total energy demand of a country; (b) it allows businesses to access easier and less expensive financial capital, which can help create a new business or expand existing ones, such as buying or building more plants, employing more workers, and buying machinery and equipment [3,4].The economy, energy, and the environment are three important elements for the development of nations because the use of energy is vital to the world economy in the present and in the future. However, an increase in energy use generates increases in carbon dioxide (CO 2 ) emissions, which cause environmental problems [5]. It would be expected that greater economic growth and economic development are related to higher levels of electricity and energy consumption in general; moreover, a greater amount of CO 2 emissions and resources from financial markets are required to fund economic development [6]. However, there are also authors who argue that financial development facilitates the reduction of energy consump...

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