Examining the role of renewable energy on the foreign exchange rate of the OECD economies with dynamic panel GMM and Bayesian VAR model

The use of renewable energy all over the world has been motivated by the need to achieve the United Nation’s sustainable development goals. This has seen researchers undertaking various studies to ascertain the impact of renewable energy use on major economic indicators for proper policy making. Thus, renewable energy has been observed to provide a significant impact on various economic indicators such as, gross domestic product, inflation rate, employment among others. However, few studies have been undertaken to ascertain the effect of renewable energy on exchange rate. Therefore, there is need for more studies to ascertain this association for proper policy making. The current study models exchange rate by including renewable energy use as its major driver in the OECD countries from 2000 to 2019, hence the major novelty of the study. Bayesian VAR model together with the first-difference and systems GMM methods are employed and the results are compared. All variables are found to exhibit a strong link with exchange rate. High, long-term interest rate, renewable energy use, terms of trade and balance of payment significantly encourage exchange rate appreciation. High, short-term interest rate, government debt and inflation rate cause exchange rate depreciation, hence, should be kept at minimum levels. This research alludes those countries that seek to achieve currency appreciation should increase long-term interest rates, promote terms of trade and positive balance of payments as well as encouraging the use of renewable energy, whereas inflation rate and government debt should be minimized.