Investigating the impulse responses of renewable energy in the context of China: A Bayesian VAR Approach

Abstract

This study applies a Bayesian Vector Auto Regression (VAR) technique to investigate the impulse responses (IR) of renewable energy (RE) on different macroeconomic variables, i.e., green finance (GF), investment in energy with private participation (IEPP), gross domestic product growth rate (GDPG), and foreign direct investment (FDI), in the context of China by using data from the years 2001–2020. Data normality and stationarity are validated before checking the VAR stability condition. The IR function captures the direct and reverse responses of RE with the shift of stipulated variables. Subsequently, it reveals the causal relationship between RE and the considered variables. The results are: (i) RE and GF are strongly endogenous, whereas IEPP and GDPG are weakly endogenous, and FDI is least endogenous; (ii) the response of RE is positive to GF and negative to FDI, IEPP, and GDPG. The reverse responses are quite similar except for IEPP, and (ⅲ) shocks from GF, GDPG, and FDI lead to more variability in RE than RE itself. Ultimately, it indicates RE's share in total energy output increases with the boost of GF and decreases with the amplification of FDI, IEPP, and GDPG. Inversely, RE's contribution boosts with the short-term increase in IEPP.