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Do Renewables Shield Inflation from Fossil Fuel-Price Fluctuations?

Author

Listed:
  • Laurent Millischer
  • Mr. Chenxu Fu
  • Ulrich Volz
  • John Beirne

Abstract

This study investigates the relationship between the adoption of renewable energy and the sensitivity of inflation to changes in fossil energy prices across 69 countries over a 50-year period from 1973 to 2022. In the wake of recently increased oil and gas prices leading to a surge in inflation, the notion of a “divine coincidence” suggests that higher levels of renewable energy adoption, in addition to fighting climate change, could mitigate fossil fuel price-induced inflation volatility. Confirming the divine coincidence hypothesis could be an argument in favor of greening monetary policy. However, our empirical results are inconsistent with the hypothesis as we find no evidence that increased renewable energy adoption reduces the impact of fossil fuel price changes on energy inflation rates. This counter-intuitive result may be attributed to idiosyncratic national energy policies, potential threshold effects, or trade linkage spillovers. As the world continues transitioning towards a low-carbon economy, understanding the implications of this shift on inflation dynamics is crucial.

Suggested Citation

  • Laurent Millischer & Mr. Chenxu Fu & Ulrich Volz & John Beirne, 2024. "Do Renewables Shield Inflation from Fossil Fuel-Price Fluctuations?," IMF Working Papers 2024/111, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2024/111
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