Determinants of energy consumption function in SAARC countries: Balancing the odds

Abstract The objective of the study is to investigate the multivariate energy consumption function for South Asian Association for Regional Cooperation (SAARC) countries (namely, Bangladesh, India, Nepal, Pakistan and Srilanka), particularly, economic growth (GDP), relative prices of energy (REP), foreign direct investment (FDI) and different financial development indicators (i.e., broad money supply, liquid liabilities, domestic credit provided by banking sector and domestic credit to private sector) over a period of 1975–2011. The results reveal that Granger causality running from all other variables to FDI which indicates a strong support for the hypothesis that energy consumption (EC), GDP, REP and FD are important determinants in promoting the FDI both in short- and long-run, in the context of Bangladesh. The results suggest for India indicate that GDP, FDI, REP and FD are useful in explaining the movements of EC in the short-run. Similarly, the Granger causality results indicate that EC, GDP, REP and FD are the important determinants of FDI. In case of Nepal, REP is the only variable whose movements in the short-run determined by movements in the other four variables i.e. GDP, FDI, EC and FD. However, the EC also provide useful information about the variable FD. The results of Pakistan indicate the causal relationship among FDI and EC which supports the “feedback hypothesis” in the short- and long-run. Similarly, both variables i.e., FDI and GDP supports the feedback hypothesis both in the long run and short run, where as FD and EC, FD and REP, FDI and REP and finally REP and GDP supports the feedback hypothesis in the short run. In case of Srilanka, this study did not find any strong support of the causality among the variables either in the short or long run except unidirectional Granger causality running from FD to EC and EC to FDI.