Financial development, energy consumption, and economic growth in the ASEAN countries: evidence from the PVAR approach

The Association of Southeast Asian Nations (ASEAN), a new global economic force, has struggled to achieve a dual objective of enhanced economic growth and improved environmental quality. Financial development is generally considered an important tool in achieving these simultaneous objectives. This paper examines the response mechanism and the inter-relationship between the ASEAN region's financial development, energy consumption, and economic growth. Unlike previous studies, the paper uses a generalized method of moments panel vector autoregression (GMM-panel VAR) framework for the 1981-2021 period. The second-generation Granger causality test is used to identify their causality relationship. Economic growth supports financial development and reduces energy consumption from fossil fuel sources in the ASEAN countries. Financial development also reduces fossil fuel energy consumption. The bi-directional relationship between economic growth and fossil fuel energy consumption exists. Energy consumption and financial development are also bi-directionally linked. However, only the unidirectional Granger causality from economic growth to financial development is found. The variance decomposition analysis results confirm that economic growth accounts for the most significant variance in fossil fuel energy consumption and financial development in the ASEAN countries. Policy implications have emerged based on these findings.