Econometric Prediction on the Effects of Financial Development and Trade Openness on the German Energy Consumption: A Startling Revelation from the Data Set

Abstract

This study aims to predict the effects of financial development and Trade openness on the German energy consumption. To ensure this, the study used time series data from 1970-2013. Following to this, the Zivot-Andrew structural break unit root test, the Bayer-Hank combined cointegration test, the ARDL bounds test and the VECM Granger causality test were applied. The findings of the study confirmed the existence of cointegration among the variables.  As a result, the study discovered that economic growth adds to energy demand in Germany. Surprisingly, financial development, capital use and Trade openness were found to decline energy demand. It was discovered that a 1% increase in economic growth influence energy consumption by 2.1053%., while a 1% increase in financial development, capital use and Trade openness decrease energy consumption by 0.1863%, 0.9269%, 0.2091% respectively. The causality analysis reveals the existence of feedback effect between financial development and energy consumption and same inference was found to exist between trade openness and energy consumption. The results of the Granger causality analysis reveal that economic growth Granger-cause energy consumption, financial development, capital use and trade openness in Germany. In the light of this, the study advocates for a continued investment effort in renewable energy and the adoption of those policies and strategies that will promote the use of ‘green’ technologies at the industrial level. While at the household level, investment should be encouraged in the appropriate energy infrastructure that could assist with the simultaneous satisfaction of efficient energy usage. Keywords: Economic Growth; Financial Development; Trade; Energy; Germany JEL Classifications: C61; D24; Q42