Financial development and energy security in the Asia-Pacific region: The long run and short run perspectives

Abstract

This study examines the long- and short-term effects of financial development on energy security for middle-income countries across the Asia-Pacific region. Using various co-integration estimators, our results show that financial development not only intensifies the overdependence of these economies on fossil fuels but also indirectly makes them sensitive to shocks coming from energy demand and supply. The rapid growth of the urban population increased power demand and, therefore, made these countries rely on unsustainable sources of energy as the most viable solution. Findings from our short-run analysis not only strengthen the results obtained from the long-run equations but also provide many interesting insights. First, a fossil-reliant economy is proven to be detrimental to the development and availability of renewable energy by indirectly making projects entailed with their use economically infeasible. Second, financial development and fossil energy usage are two key forces explaining the rapid growth of these economies.