Financial Development and Energy Consumption Dynamics in Turkey

Abstract

This paper investigates the relationship between financial development and energy consumption in Turkey over the period from 1980 to 2022, employing cointegration and causality methodologies to analyze the data. The primary objective is to discern whether there is a long-term equilibrium relationship and short-term causal dynamics between these two critical economic variables. The results of the cointegration analysis indicate that there is no long-term relationship between financial development and energy consumption in Turkey. This suggests that changes in financial development do not have a sustained impact on energy consumption patterns over the long run. However, the causality analysis reveals different insights for the short-term interactions. The findings support the neutrality hypothesis in the short run, indicating that there is no causative effect between financial development and energy consumption during this period. This implies that in the short term, fluctuations in financial development metrics do not significantly influence energy consumption, and vice versa. The observed inconsistency across various studies examining Turkey underscores the importance of the financial development indicators used in the analysis. Different studies may proxy financial development with diverse indicators, leading to varied conclusions. This highlights a critical methodological consideration: the selection of appropriate financial development measures is crucial for accurately capturing the relationship between financial development and energy consumption. In this study, several indicators of financial development were considered, including measures of banking sector development, stock market development, and overall financial market efficiency. Despite the comprehensive approach, the cointegration results consistently showed no long-run relationship. This outcome suggests that structural factors unique to Turkey, such as its economic policies, market regulations, and energy consumption patterns, might play a significant role in shaping the long-term dynamics between financial development and energy consumption. The short-run neutrality observed through causality tests further suggests that immediate changes in financial policies or market conditions may not directly affect energy consumption behaviors. This finding can have significant policy implications, indicating that efforts to reform financial markets may not yield immediate changes in energy consumption patterns, and vice versa. Policymakers should therefore consider this temporal dimension when designing integrated financial and energy policies. Overall, this paper contributes to the ongoing debate on the energy-finance nexus by providing new evidence from Turkey, a rapidly developing economy with unique financial and energy sector dynamics. The lack of a long-term relationship and the short-term neutrality highlight the complexity of this nexus and suggest that the relationship is not straightforward. Future research should continue to explore different financial development indicators and consider other potential influencing factors, such as technological advancements, regulatory changes, and global economic conditions, to gain a more comprehensive understanding of this relationship.