The relationship between renewable energy and economic growth in European countries: Evidence from panel data model with sharp and smooth changes

Abstract

In recent years, there has been a rapid increase in the trend towards environmental sustainability through the adoption of renewable energy resources. However, the main concern revolves around whether renewable energy consumption contributes to economic growth. Thus, this study aims to investigate the relationship between renewable energy and economic growth in European countries from 1970 to 2019 using panel data analysis with structural breaks. Additionally, this study demonstrates the influence of renewable energy consumption, capital stock, and the human capital index on economic growth performance in European countries. To control for structural breaks with sharp and smooth changes in the model, Bai & Perron's [10–11] structural breaks test and Sun et al.'s [66] time-varying fixed effects model are applied. The findings indicate that modeling significant structural breaks helps to consider nonlinearity in the model structure, define time dynamics in relationships, and gain new insights. Moreover, new modeling approaches reveal the validity of the time-varying effect of renewable energy on economic growth. Based on the obtained results, this study provides policy implications for governors and researchers.