Examining the effect of renewable energy on exchange rate in the emerging economies with dynamic ARDL bounds test approach

Abstract

Macroeconomic indicators are crucial in the transitioning from the use of non-renewable energy (NRE) to renewable energy (RE). This study is an attempt to examine the relationship between RE and foreign exchange rate of the emerging economies, Brazil, China, Indonesia, India, Mexico, Russia and Turkey, the E7 economies. The study employs the dynamic ARDL bounds test approach from 1990 to 2019. The relationship between exchange rate and RE has not been widely done, yet this association is crucial considering the short-term high costs of RE and yet some countries import materials to harness RE, such as solar panels, due to poor technology in such countries. The current study differs from past studies that, it attempts to examine this association, in such a way that, provides a comparative analysis of the seven emerging countries. Past studies considered panel data analysis and single country analysis. The major findings of this study show that, different countries exhibit different links between RE and exchange rate, hence the need for region-specific studies to ensure proper policy making. Generally speaking, this research finds out that, GDP, BOP, real interest rate and RE promotes exchange rate appreciation, while inflation rate causes currency depreciation. Policy recommendations are also given, accordingly.