This study examines whether and how financial development contributes to energy security at the global level. While prior studies have explored the direct impact of financial development, the underlying mechanisms and cross-country heterogeneities in this relationship remain underexplored. This study aims to address these gaps.
The authors analyze panel data from 63 countries over the period 1996–2018. To address potential econometric issues, the authors use Driscoll–Kraay estimation, Granger causality test, Lewbel IV estimation and two-step system generalized method of moments′.
The results show that financial development positively and significantly impacts energy security. This finding is robust across different estimation methods. Mechanism analysis indicates that financial development enhances energy security by promoting technological innovation, reducing energy consumption and increasing renewable energy adoption. No evidence of a nonlinear relationship between financial development and energy security is found. Further analysis reveals that the positive effect of financial development is primarily driven by the financial institutions component, while financial markets play a more limited role. Moreover, the impact is heterogeneous across countries, being significant in emerging markets and developing economies, non–International Energy Agency (IEA) countries and net energy-importing countries, but insignificant in advanced economies, IEA members and energy exporters.
This study provides a comprehensive global assessment of the finance–energy security nexus by identifying key transmission mechanisms and uncovering important cross-country heterogeneities.
