Energy Efficiency and the Role of Financial Development, Trade Openness and Technological Innovation:  Exploring the Dynamic Linkages for Pakistan

The study explores the dynamic linkages among financial development, trade openness, technological innovation and energy efficiency in Pakistan utilizing cointegration tests, Directed Acyclic Graphs (DAG) and Structural Vector Autoregression (SVAR) model for the period 1980-2017. The results of Johansen cointegration show that variables ae cointegrated. The robustness of cointegration relationship is confirmed by applying Gregory-Hansen structural break cointegration. The empirical findings imply that financial development and technological innovation positively and significantly stimulate energy efficiency while trade openness and economic growth negatively and significantly impact on energy efficiency in long-run. The DAG results explain the evidence of causality from financial development, trade openness, technological innovation and economic growth to energy efficiency. The results of forecast error variance decomposition from SVAR model describe that technological innovation has greater impact on energy efficiency in short-term but its impact gradually decreases with the extension of forecast period. On contrary, the promotion effect of financial development and trade openness on energy efficiency increase gradually over time and become highest in long-run. This finding underlines the relevance of technological innovation and trade openness to policy makers in order to achieve energy efficiency in Pakistan.