Exchange rate stability in the emerging economies: does renewable energy play a role—a panel data analysis
Year: 2022
Type: article
Abstract: The Environmental Kuznets Curve alludes that there is an inverted U-shaped association between the economic growth of a nation and environmental stress. This implies that, as the Gross Domestic Product of a nation rises, environmental stress will initially rise and later decline after a turning point is reached. Rising economic growth together with an increase in environmental degradation necessitates a trade-off situation as nations face a dilemma regarding what to forego as both indicators are equally important. According to the literature, adopting the use of renewable energy helps mitigate this dilemma since it is friendly to the environment and also reduces income inequalities. The current study is aimed at investigating whether renewable energy use helps stabilize the foreign exchange rate of emerging economies. 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. FMOLS and DOLS provide robust results in the presence of cointegration among variables and on panel data that has aa unit root at level and is stationary at first difference. The Pedroni and Kao cointegration tests are employed and the results show that a long-run relationship exists among the variables examined. The study uses the results obtained from the DOLS model for policy recommendations since its results have no autocorrelation and Partial Autocorrelation problems, and the residuals are normally distributed. In this research study, we suggest that renewable energy should be promoted since it helps to stabilize the foreign exchange rate. An increase in Gross Domestic Product is also observed to promote exchange rate stability in the E7 economies, while a high rate of inflation, high population growth and trade are associated with currency depreciation.
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4308077079