The mitigating effect of governance quality on the finance‐renewable energy‐growth nexus: Some international evidence

Abstract

AbstractThis study analyses the conditional effect of governance quality on the finance‐renewable energy‐growth nexus in 123 countries from 1990 to 2017. We built composite indexes of financial development and governance quality through the principal component analysis (PCA) using several financial variables and governance indicators. We employed the generalized method of moments (GMM) and the two‐stage least squares (2SLS) techniques, but also the Granger non‐causality in Dumitrescu and Hurlin (2012). First, the disaggregated analysis shows that renewable energy consumption, financial inclusion, financial efficiency, and financial stability have positive marginal effects on economic growth under a good governance quality, except for financial depth. Second, the aggregated analysis confirms the positive marginal impact of financial development on growth only in low‐income economies, whereas renewable energy consumption has positive marginal effects only in lower‐middle‐income and upper‐middle‐income economies. Finally, the results of the causality analysis differ among countries. Overall, governance quality has a threshold effect on the finance‐renewable energy‐growth nexus, which varies across countries. Accordingly, our study suggests more improvements in the governance quality in these countries, especially in the low‐income and high‐income countries, to enhance the marginal impacts of financial development and renewable energy consumption on growth.