Analyzing the causal relationship between exchange rate, renewable energy and inflation of Mexico (1990–2019) with ARDL bounds test approach

Abstract

This paper is an attempt to examine the long-run and short-run relationship between inflation, exchange rate, and renewable energy use in Mexico during the period 1990–2019 by employing ARDL bounds test approach. The results of the study show that in the long-run there is a bidirectional causality between inflation and exchange rate. Renewable energy use in Mexico also impacts both inflation and exchange rate but exchange rate and inflation do not impact renewable energy in the long-run. The short-run ARDL model results provides that an increase in renewable energy use in Mexico has the impact of encouraging exchange rate appreciation. The results of this paper shows that renewable energy does not only reduce carbon-dioxide emissions which causes global warming, rather it encourages exchange rate appreciation in Mexico. Therefore, renewable energy use should be encouraged since it will cause currency appreciation of nations as well as leading to zero carbon in the future, a goal by the United Nations. High inflation in Mexico is also found to cause currency depreciation and vice versa.