Central Bank Response to Rising Oil Prices: An ARDL Bounds Testing Approach to Cointegration

The study empirically explores the relationships among energy use, economic growth and financial development for India and China on annual data for 1971 -2011. Using Auto Regressive Distributed Lag (ARDL) approach to cointegration model, it suggests that energy consumption is positively influenced by proportion of urban population, while it is negatively influenced by financial development, economic growth and proportion of industrial output in both the economies. The results also further suggest that urbanization adversely influences economic growth, whereas energy use positively influences growth for India. In contrast, while financial development, energy use and industrial output adversely influence the growth, the urbanization favorably influences the same for China. The finding for China is quite contrary to the common belief that the performance of industrial sector is the key success for achieving higher growth.