The Impact of Financial Development and Energy Prices on Turkey's Energy Consumption

Abstract

This paper explores the intricate relationship between energy consumption, economic growth, energy prices, financial development, and trade openness in Turkey over the period from 1960 to 2020. Utilizing a comprehensive dataset and robust econometric techniques, the study aims to elucidate the long-term interactions among these critical economic variables. The findings reveal that economic growth and trade openness positively influence energy consumption in the long run. This positive relationship suggests that as Turkey's economy expands and integrates more deeply into global markets, the demand for energy correspondingly increases. Economic growth typically leads to greater industrial activity, higher production outputs, and improved living standards, all of which drive up energy consumption. Similarly, trade openness, by fostering international trade and economic activities, necessitates higher energy usage to support the associated increase in production and transportation. Conversely, the study finds that financial development and energy prices negatively affect energy consumption in the long run. The negative impact of financial development on energy consumption might be explained by the increased efficiency and technological advancements that often accompany financial growth. As financial markets develop, they facilitate investments in energy-efficient technologies and renewable energy sources, leading to a reduction in overall energy consumption. Higher energy prices, on the other hand, naturally deter excessive energy use by making it costly, thus encouraging both consumers and businesses to adopt energy-saving measures and technologies. The study also identifies bidirectional causality between energy consumption and economic growth, indicating a feedback loop where each variable mutually influences the other. This bidirectional causality underscores the interdependence between energy usage and economic performance, highlighting that energy consumption is both a driver and a consequence of economic growth. As the economy grows, energy consumption rises, which in turn supports further economic activities and growth. Furthermore, the research uncovers unidirectional causality from financial development to energy consumption in the long run. This finding suggests that improvements in financial markets and institutions can lead to changes in energy consumption patterns. Specifically, as financial development progresses, it may enhance access to capital for energy-efficient technologies and infrastructure, thereby reducing overall energy consumption. The implications of these findings are significant for policymakers in Turkey. To sustain economic growth while managing energy consumption, there is a need for balanced strategies that promote both economic expansion and energy efficiency. Policies that encourage technological innovation, energy efficiency, and the adoption of renewable energy sources can help mitigate the environmental impact of increased energy consumption. Additionally, measures to stabilize energy prices and enhance financial development can contribute to more sustainable energy usage patterns.