Exchange rate stability in the emerging economies: does renewable energy play a role-a panel data analysis

Abstract

Due to the high and rising rates of carbon emissions, the use of renewable energy sources has been encouraged to help achieve carbon neutrality goal. However, renewable energy sources are said to be expensive than fossil fuels. Major studies have been undertaken to ascertain the association between renewable energy and many economic indicators, such as gross domestic product, employment rate, and inflation rate. The current study is aimed at investigating whether renewable energy use helps stabilize the foreign exchange rate of emerging economies, which has not been widely examined in the past, hence the study originality. Stability in the foreign exchange rate of a nation is very crucial as this helps to stabilize the inflation rate. This study employs the fully modified ordinary least and dynamic ordinary least square methods to analyze panel data of emerging economies. The findings indicate that high real interest rate and gross domestic product causes appreciation in the currency exchange of a country, while high balance of payment, inflation rate and renewable energy consumption are found to cause currency depreciation. The Pedroni and Kao cointegration tests are employed and the results show that a long-run relationship exists among the variables examined. This research recommends balance of payments and inflation rate to be minimized if exchange rate stability is to be achieved, while gross domestic product and real interest rate should be increased.

Keywords: Emerging economies; Environmental Kuznets curve; Exchange rate; Renewable energy.