Nexus between renewable energy consumption, foreign capital flows, and financial development: New evidence using CUP-FM and CUP-BC advanced methods

Abstract

The study tries to explore the impact of foreign capital flows and financial development on renewable energy consumption. The empirical analysis is conducted using data for 17 developing countries for the period 1990 to 2020. The analysis is conducted for three sets of countries i.e. high-income developing countries, low-income developing countries, and all developing countries. The study uses sophisticated panel data estimation approaches to find the results, i.e. continuously-updated and fully modified (CUP-FM) and continuously updated and bias-corrected (CUP-BC) panel estimation techniques. The results show that financial development and capital flows positively affect renewable energy in all three samples of developing countries. The study also employs the Dumitrescu and Hurlin (2012) panel causality test to analyze the causal relationship among variables. Bidirectional causality is found between FD and RE and between CF and RE in all income developing countries group and high-income developing group but a unidirectional causality is found from FD and CF to RE in low-income developing countries group. On the basis of the findings of the study, it is recommended that to promote RE in developing countries it is imperative to encourage FD and CF in these countries. Further, developing countries ought to support the concept of green financing and need to allocate funds for investments in green energy to promote sustainable energy resources.