Financial development as a new determinant of energy diversification: The role of natural capital and structural changes in Australia

Abstract

This paper investigates the relationship between financial development and energy diversification for Australian economy by considering natural capital, structural changes, economic growth, and export diversification as additional determinants of energy diversification demand function. The bootstrapping ARDL cointegration approach is applied for examining cointegration relationship between energy diversification and its determinants by considering presence of structural break stems in the series. Our empirical analysis reveals that financial development affects energy diversification positively. Natural capital is positively linked with energy diversification. Structural changes have favourable effect on energy diversification. Economic growth declines energy diversification. The relationship between export diversification and energy diversification is negative. Financial development and energy diversification have a nonlinear relationship between with an inverted-U shaped. The bootstrapping ARDL Granger causality analysis reveals the presence of feedback effect between financial development and energy diversification. This empirical analysis provides new policy insights for Australian policy makers using financial development as economic tool to boost up energy diversification.