Does Renewable Energy Convey Information to Current Account Deficit?: Evidence from OECD Countries

Energy trade balance has been the main factor behind current account imbalances in many developed and developing countries. This study investigates whether or not renewable energy conveys information to the current account deficit of selected OECD countries. Utilizing a dataset spanning from 1990 to 2021, we apply a Panel Autoregressive Distributed Lag (ARDL) estimator to determine the interrelation of current account deficit (CAB) as a percentage of GDP with selected indicators, namely, net energy import in total final energy consumption (NEI), the share of renewable energy in total electricity production (REN_TEO), and fiscal deficit as a percentage of GDP (FAB). The results of long-term estimations reveal that as net energy import increases, the current account deficit deteriorates. On the other hand, in the case that countries utilize more of renewable energy in their total electricity generation, their current account deficits improve. Thus, we conclude that energy policy matters for the current account balances and subsequently for the well-being of OECD economies. Finally, we find strong evidence for the twin deficit hypothesis, as fiscal deficit is negatively interrelated with current account deficit both in the short-run and long run. In other words, an increase in the level of budget deficit is associated with an upsurge in the current account deficit problem. Furthermore, the Dumitrescu-Hurlin causality test reveals that there is bidirectional heterogeneous causality between current account deficit and budget deficit. Additionally, when the countries in the sample are grouped by their per capita GDP levels, estimations reveal that the direction of interaction between CAB and energy-related indicators (NEI and REN_TEO) does not differ between Group 2 (the ones whose per capita incomes are over USD 25,000 but below USD 50,000) and Group 3 (the ones having more than USD 50,000 per capita income) countries. However, the coefficients of energy-related indicators for Group 2 countries are higher than those of Group 3 ones, suggesting that energy policy matters more for Group 2 countries’ current account imbalances in the long-term.