The Historical Roots of Energy Consumption: Does Financial Development Matter?

ABSTRACT The objective of this study is to investigate how statehood experience affects energy consumption through the advancement of finance and its sub‐sectors. By doing so, the study uses the ordinary and two‐stage least squares methods to analyze data from 111 countries spanning from 2000 to 2018. Following the econometric estimations, the results show that accumulated statehood experience has an inverse impact on energy consumption through its influence on financial development. Furthermore, by splitting financial development into its main sub‐indices, the strongest indirect effects occur through financial institutions' development. However, the nature of this indirect impact relies on the development level of financial institutions. Indeed, the indirect effect is positive when the advancement rate of financial institutions is less than 0.39. On the other hand, it becomes negative when the advancement rate of financial institutions is above 0.6. Policy implications are discussed.

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