Does Governance Quality Moderate the Finance-Renewable Energy-Growth Nexus?: Evidence from Five Major Regions in the World

Abstract

This paper investigates the moderating role of governance quality on the finance-renewable energy-growth nexus in five major regions in the world, including 123 countries from 1990 to 2017. These regions concern the Asia Pacific, Europe & Central Asia, America (North America and Latin America & Caribbean), Middle-East and North Africa (MENA), and Sub-Saharan African (SSA) regions. Following the principal component analysis (PCA), we constructed composite indexes of governance quality and financial development using six institutional indicators and eight financial variables. Next, we applied the two-stage least squares, difference-GMM, and system-GMM methods, as well as the Granger non-causality test in Dumitrescu and Hurlin (2012). First, the results show that better governance quality wipes out the harmful effects of financial development and renewable energy consumption on economic growth in the Asia Pacific, MENA, and SSA regions, respectively. Conversely, the level of governance quality reduces the positive effects of financial development and renewable energy consumption on economic growth in America, with few exceptions in Europe & Central Asia region, respectively. Second, we find marginal adverse effects of financial development and renewable energy consumption on growth in the Asia Pacific, MENA, and SSA regions due to their low levels of governance quality. However, the marginal effect of renewable energy consumption on growth is positive in America and Europe& Central Asia regions, whereas the marginal effect of financial development is negative in these regions in most cases. Third, there is bidirectional causality between financial development and economic growth in all areas, whereas the bidirectional causality between renewable energy consumption and growth is only confirmed in America and SSA regions, respectively. This study reveals the threshold effect of governance quality on the renewable energy-finance-growth nexus across regions. Thus, financial development, renewable energy consumption, and governance quality are complementary factors to enhance economic growth in the Asia Pacific, MENA and SSA regions, contrary to America and Europe & Central Asia regions, with some exceptions. Therefore, policymakers should improve the level of governance quality, the efficiency of financial systems and renewable energy consumption to promote sustainable development in the different regions, especially in the Asia Pacific, MENA, and SSA regions.