Renewable Energy 189 (2022) 1154e1165

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Renewable Energy
journal homepage: www.elsevier.com/locate/renene

An analysis of the impact of fiscal and monetary policy fluctuations on

the disaggregated level renewable energy generation in the G7
countries
Chuanwang Sun a, b, *, Anwar Khan a, c, Yongzhe Liu d, Ni Lei e, **
a
China Center for Energy Economics Research, School of Economics, Xiamen University, Xiamen, Fujian, 361005, China
b
MOE Key Laboratory of Econometrics, School of Economics, Xiamen University, Xiamen, 361005, China
c
Balochistan Think Tank Network, Quetta, Balochistan, Pakistan
d
Department of Economics, School of Economics, Xiamen University, Xiamen, Fujian, 361005, China
e
School of Public Administration, Faculty of Economics and Management, East China Normal University, Shanghai, 200062, China

a r t i c l e i n f o a b s t r a c t

Article history: The primary aim of sustainable development goals (SDGs) 2030 is to provide a better and more sus-
Received 29 November 2021 tainable future for all. Therefore, it is obligatory to focus on all points of SDGs to reach sustainable
Received in revised form production and consumption by leaving no point behind. Achieving these goals is impossible if reor-
21 February 2022
ientation of fiscal and monetary policies is overlooked, which have substantial policy scope. The current
Accepted 4 March 2022
Available online 7 March 2022
study plans to establish the linkages from monetary and fiscal policies of G7 countries to disaggregated
level renewable energy generation between 2000 & 2018. The study adopts the standard Stochastic
Impact of Regression on Population, Affluence, and Technology (STIRPAT) model and crossectional
Keywords:
Fiscal policy
augmented econometric algorithms to reach unbiased and efficient conclusions. The empirical results
Monetary policy imply that fiscal expansion has a significant positive role in renewable energy generation. At the same
Renewable energy generation time, the expansionary monetary policy indicates a negative response to the investment in renewable
Sustainable development energy generation of the G7 countries. The results imply a similar response tendency on the dis-
BRI countries aggregated levels of energy generation. However, the causal test responds that there is unidirectional
causality from renewable energy towards the fiscal and monetary policy indicators of G7 economies. The
updated policies are drawn for theory and practice.
© 2022 Elsevier Ltd. All rights reserved.

1. Introduction
With ten years in hand to achieve the sustainable development
goals, the global leaders in September 2019 called for SDGs summit
as Decade of action, delivery for sustainable development, pledge to
mobilize financing, augment national level implementation and
enhance the institutional capability to target goals 2030 by leaving
no one behind [1]. Therefore to address the sustainable develop-
mental agenda, the advancement of environmental economics
programs that reduce risks in human welfare social equities
strengthen ecological and environmental amenities is thus
* Corresponding author. China Center for Energy Economics Research, School of
Economics, Xiamen University, Xiamen, Fujian 361005, China.
** Corresponding author. School of Public Administration, Faculty of Economics
and Management, East China Normal University, Shanghai, 200062, China.
E-mail addresses: cw_sun@foxmail.com (C. Sun), anwar.aerc@gmail.com
(A. Khan), patrick_liu2000@foxmail.com (Y. Liu), nlei@dem.ecnu.edu.cn (N. Lei).
required [2,3]. The primary goal of assuring employment and in-
come can be achieved by targeting private and public sector in-
vestment, which are low carbon emission agents, ensuring
productivity and reducing the costs of environmental and ecolog-
ical depletion [3]. However, this cannot be possible without proper
planning and paying significant attention to green production
policies. In this regard, renewable energy shares potential and is
used to provide sustainable solutions to mitigate environmental
issues through green economic policies for sustainable develop-
ment. It's not new to environmental economists; rather, it has been
in discussion for a long time [4e7].
Currently, energy conservation policies are on high alert to
achieve a sustainable development plan. Hence, the governmental
policies that address renewable energy highly influence the
renewable energy base, especially in applying fiscal and monetary
policies that are powerful instruments to affect investment and
public spending [3,8]. Renewable energy has high costs and risks

https://doi.org/10.1016/j.renene.2022.03.027
0960-1481/© 2022 Elsevier Ltd. All rights reserved.
C. Sun, A. Khan, Y. Liu et al. Renewable Energy 189 (2022) 1154e1165

Abbreviation DOLS Dynamic OLS

S Solar energy generation
ADF Augmented Dickey-Fuller ECT Error correction term
MDF Modified-DF SDG Sustainable development goals
ARDL Autoregressive distributive lags F Fiscal policy
MPU Monetary policy uncertainty STIRPAT Stochastic Impact of Regression on Population,
BRI Belt & Road initiative Affluence, and Technology
OECD Organization of Economic Cooperation and FMOLS Fully modified OLS
Development UDF Unadjusted Dickey-Fuller
BRICS Brazil, Russia, India, China, South Africa G7 Group of Seven countries
OLS Ordinary Least squares UMDF Unadjusted modified Dickey-Fuller
CADF Crossectional augmented DF GDP Gross domestic product
P Population US United States
CIPS Crossectional Im, Pesaran, Shin H Hydro energy generation
PCD Panel Crossectional dependence VAR Vector Autoregressive
CO2 Carbon dioxide emissions IPAT Impact of population, affluence, and technology
PMG Pooled mean group W Wind energy generation
DF Dickey-Fuller IRENA International Renewable energy agency
PSH Panel slope homogeneity WDI World development indicators
DK Driscoll & Kraay M Monetary policy
R Renewable energy generation Y Real GDP per capita

associated with other forms of energy [3]. Despite their enormous
cost, the need to transition from nonrenewable to renewable en-
ergy generation is of high interest to policymakers in applied
environmental economists. In doing so, the governments and pol-
icymakers must regulate the green monetary policies, which are
the principal instruments to be redesigned to create greener
economies.
Predominantly, the governments use monetary and fiscal policy
to control and influence production, investment, and consumption.
The government regulates both (monetary and fiscal) policies to
stabilise economic growth and production levels, directly fuelled by
energy. This makes renewable energy very sensitive towards gov-
ernment policies (fiscal and monetary). The government uses these
two specific approaches to regulate the investment and economic
volume; both have significant responses to increase or decrease
production levels. The first fiscal policy, which based on increasing
and decreasing the national taxation base, and the central bank
regulates others through its interest rate and open market opera-
tions. Strict monetary and fiscal policies can discourage investors,
and capital provision would remain an obstacle by raising the
capital cost available to the investors. These policies could affect
renewable energy by increasing the capital cost available for the
renewable energy sector. On the other hand, the lenient policies
provide a viable investment in the renewable energy sector, thus
encouraging renewable energy consumption. Taking these as the
major points, the current study thus attempted to fill the gap by
analyzing the linkages between prominent economic policies and
their role in renewable generation in G7 countries. This would
undoubtedly help policymakers transition from a nonrenewable
energy base towards renewable energy production by enabling a
sustainable environment.
The group of seven (G7) is an informal group of seven countries
d Canada, France, United States, Germany, Italy, United Kingdom
and Japan. Together the member countries occupy 15% of the land
area, 40% of global GDP, and 10% of the world's population. Their
contribution to economic growth is vital, and their share in CO2
emissions is also huge, i-e, 24.4% globally. However, this vast share
in CO2 has started declining after 2000 due to reasons like energy
shifts from nonrenewable to renewable energy shares in produc-
tion and technological innovations, which enhanced the energy
1155
efficiency in production [9]. A record economic growth of 39% was
seen in Canada between 1990 & 2001, with a population growth of
13% to reach 30 million today. Based on the per capita, Canada is the
highest among the OECD countries, with the contribution of natural
resources to the national GDP of Canada as a leading agent of 13.6%.
Similarly, Canada contributes to 40% of global softwood lumber
providers and is the primary exporting agent of fisheries, oil, and
energy products [10]. Similarly, the United States (US) contributes
17.3 trillion to GDP is the second-highest contributor to greenhouse
gas emissions; again, it's the second-highest in installed renewable
energy capacity across the globe [11]. In addition, Wang et al. [12],
stated that in the United States, energy-based CO2 emissions have
reduced 12% from 2007 to 2016, and GDP increased 19% over the
same period. Similarly, further details regarding the energy profile
of G7 countries are given in Fig. 1 and the report of Wagner [13] by
Statista.
The study offers various contributions to the literature; the most
significant among them are as under; this study analyzes the
response of fiscal and monetary policy on disaggregated level
renewable energy generation. Secondly, the study focuses on
assessing the disaggregated level data of G7 at a single stage to
analyze the responses of fiscal and monetary policies on renewable
energy generation, which has not been carried out in any investi-
gation. The third central point is that this research has adopted
second-generation econometric approaches, which can address the
crossectional dependence and panel slope heterogeneity that has
been overlooked in previous studies. Finally, this study made
rigorous efforts to analyze the data efficiently; therefore, on a global
scale, we feel the study would produce vital policy insights that
would be of greater importance to these areas specific and the
globe in general.
The rest of the research paper has been organized as; the second
part focuses on the literature review, the third section explains the
data, models, and methods. Similarly, the fourth section of the
study highlights the results, interpretation and discussion, con-
clusions, and policy implications.
2. Literature review
There has been a tremendous debate started on the role of
C. Sun, A. Khan, Y. Liu et al.
Fig. 1. G7 countries consume more renewable energy- Source: Wagner [13] by Statista.
economic policies uncertainty and their reflection on various actors
of environmental degradation. Similarly, the role of various such
indicators on renewable energy has been a hot topic on the tables of
environmental economists recently. For example, the studies which
have highlighted the empirical associations on renewable energy
and environment [14e18], renewable energy and economic growth
[15,16,19,20], and fiscal and monetary policy and their environ-
mental consequences [21e26] are discussed in detail. However,
studies that have addressed the impact of economic policies on
renewable energy generation at total scale and disaggregated levels
are scant. Accordingly, the literature review section of the study
consists of two strands. The first strand discusses the fiscal policy
and its channel towards renewable energy generation. The second
strand examines monetary policy and renewable energy generation
relationships.
2.1. Fiscal policy and renewable energy
There is a growing debate that fiscal policy is crucial in making
the economies more inclusive and greener. Over the data
2004e2016 using Likelihood ratio and Hausman ratio tests, Azh-
galiyeva et al. [27], found a significant role of fiscal policy on the
investment in renewable energy production. A recent study by
Florea et al. [28], revealed that budget and public debt policies have
a unilateral response to renewable energy consumption in the
European Union in the FMOLS framework. Similarly, Tenrini &
Nugroho [29] responded that implementing the fiscal policy on the
palm oil production industries have witnessed positive responses.
Further, Yoshino & Taghizadeh-Hesary [30] have viewed that
investing in projects of renewable energy is risky, and finance is not
available or available at high-interest rates. Therefore, this study
suggested that taxation revenue from the pollution agents would
be allocated in the renewable energy generation projects. Semih
Sen [31] observed that the developed European countries have
streamed fiscal incentives; therefore, their reliance on renewable
energy is remarkable. However, the fiscal incentives through fiscal
policy in Turkey, which is resourceful in renewable energy, has not
gotten a good advantage in terms of fiscal policy incentive; there-
fore, it is lagging. Similarly, using the data of 158 renewable energy
enterprises over 2010e2018 in the Richardson model framework,
Meng et al., [32], using the fixed-effect, concluded that subsidies in
1156
Renewable Energy 189 (2022) 1154e1165
fiscal policy aggravate over investment while fiscal tax incentives
alleviate under investment in renewable energy. Likewise, Chang
et al. [33], used the data over 2010e2017 in the Data envelopment
analysis framework reported that the taxation rebates have a
higher positive impact on the total investment and technical effi-
ciencies than taxation rebates. Similarly Brown & Chandler [34]
revealed that fuels and energy have the potential to transform the
nation's energy system while meeting the energy security, and
climate change process and other goals of sustainable develop-
ment; therefore, the fiscal and monetary policies have crucial roles
to play in a sustainable world.
2.2. Monetary policy and renewable energy
Investing in renewable energy generation has higher risks
associated with other forms of energy, making it very sensitive
towards monetary policy. Simultaneously, Razmi et al., [3], studying
the role of shocks to the money supply in the VAR framework, has
impacted Iran's renewable energy generation over 1984e2016.
Similarly, He et al., [35], employing the data of 92 enterprises
working on renewable energy generation in China from 2007 to
2017, implied that an easy monetary policy might boost the in-
vestment opportunity for renewable energy generation in Chinese
enterprises. Studying the data of Latin America, Frutos-Bencze et al.
[36], concluded that the monetary policy is responsive in renew-
able energy generation. They further added that there is a signifi-
cant relationship between clean energy share and government
spending's, thus helping to raise the economic growth of the study
area. In a recent study, Nga [37] found a long-run association be-
tween monetary policy variables and renewable energy for Viet-
nam between 1985&2019 in the VAR framework. Likewise, Using
symmetric and asymmetric ARDL approach over 1985e2019 for the
United States MT et al. [11], observed short and long-run negative
influence of monetary policy uncertainty on the renewable energy
consumption in symmetric approach. Likewise, results revealed
that decreased MPU impacts renewable energy negatively in the
United States over the same period.
Campiglio [38] reported that the bank doesn't lend to low car-
bon activities; however, monetary policy tools work in emerging
economies where the credit-control remains with the public. It
does not depend solely on the interest rates. Another research Liu
C. Sun, A. Khan, Y. Liu et al. Renewable Energy 189 (2022) 1154e1165

et al. [39], using the data of China between 2007Q1 & 2017Q4
showed heterogeneous responses of economic policy uncertainties
on renewable and nonrenewable energy for the long run. Monetary
policy uncertainty impedes investment in nonrenewable energy,
while this relationship was insignificant for renewable energy.
More particularly, the economic uncertainty policies reduced the
investment in petroleum and coal, increasing the investment in
geothermal, solar, and other forms of renewable energies.
From a careful review of pertinent literature, we came to know
that a limited number of studies have dared to analyze the impact
of fiscal and monetary policies on energy. However, no studies have
addressed the impact of these indicators on renewable energy
generation generally, and specifically in G7 countries. Therefore,
the main objective of the current study is to test the impact of
monetary and fiscal policy expansions and contractions on
renewable energy generation in the G7 countries, which has worth
for policy proposals.
3. Models, methods, and data
The study started proper analysis of the data in different steps
and was segregated into different parts. The data gathered, models
for empirical estimation followed by econometric methods
employed.
3.1. Data source and presentation
For the formal analysis, we have obtained reliable and updated
data from two different sources, the World Bank and International
Renewable Energy Agency (IRENA), for the selected G7 countries
(Canada, United States, Germany, France, Japan, Italy, United
Kingdom, United States). We have drawn the time series data over
2000e2018 from the IRENA [40] for the dependent variables at a
disaggregated level. Similarly, for the major variables of fiscal and
monetary policy, we obtained the data from OECD [41]; for the rest
of the major independent, and controlled variables, the data is
obtained from the World Bank [42]. For a clear picture of the data
and their units of measurement, we have given a detailed outlook
of descriptive statistics in Table 1. The presentation of the main
variables is shown in Fig. 2. The descriptive statistics indicate that
all the variables have no outliers and are stable. The considerable
variations in minimum and maximum values of the variables imply
significant variations across the considered variables, specifically in
the case of the main variables (tax revenue and interest rate). The
given mean and standard deviation of the modelled variables have
shown the tendency of variation from their mean values, which is
considered very high in some variables while relatively low and
stable in some.
3.2. Model-STIRPAT
We employed the disaggregated level renewable energy gen-
eration between 2000 & 2018 and constructed the STIRPAT (Sto-
chastic Impact of regression by Population, Affluence, and
Technology) model to analyze the influence of monetary and fiscal
policy's role in disaggregated; level renewable energy generation
for G7 countries. The original form of the STIRPAT model, following
Dietz & Rosa; York et al. [43,44], was standard “IPAT (Impact of
Population, Affluence, and Technology)” model given as;
I ¼ PAT (1)
Where I indicate environmental impact, PAT imply population,
affluence and technology. It shows the environmental impact is the
product of population, affluence, and technology. However, there
were imperfections in the IPAT model, and to remove the imper-
fections of this model, Dietz & Rosa [43] instrumented a model
(STIRPAT), which has the following functional form;
I ¼ aP b Ag T d (2)
Here, I indicate the environmental impact, denoted with dis-
aggregated energy generation in the current study. Similarly, PA
and T mention population, affluence, and technology, which can be
determined with the help of Population, real GDP, and patent
technological innovations. Similarly, a; b; g; and d are coefficients.
Taking the logarithm of Equation (2) will yield the following form;
LnI ¼ Lna þ bLnP þ gLnA þ dLnT þ Lnε (3)
Where, a is slope coefficient, b; g; and d are elasticities of Popula-
tion, affluence, and technology, while ε is the corresponding error
term of Equation (2). The positive elasticity of the explanatory
variable implies the positive relationship with the dependent var-
iable; similarly, a more significant coefficient of the explanatory
variable indicates the more considerable impact of the explanatory
variable on the dependent variable [44,45]. The probability values
of a corresponding explanatory variable may be used to determine
the impact on the dependent variable at various significance levels
(1%, 5%, and 10%), where ε is corresponding error term of the model
[45,46]. Taking advantage of this model, which can add more
macroeconomic variables to reveal the impact on the environment,
formed a following empirical model to be tested.
LnRit ¼ a0;it þ a1;it Pit þ a2;it Yit þ a3;it Iit þ a4;it Mit þ a5;it Fit þ mit
(4)
In this empirical form of the model, LnR indicate the logarithmic
form of renewable energy (including total renewable energy, hydro
energy, wind energy, and solar energy generation). a1; ………; a5 are

Table 1
Variables, Definition, descriptive statistics, and data source.

Variables Definition Mean St. Source

Deviation

R Renewable energy (Gigawatt hours) generation at a disaggregated level (Total renewable energy, hydropower, wind energy, solar 11.6680 0.9928 IRENA
energy)
H Hydro energy Gigawatt hours 10.9579 1.3745 IRENA
W Wind Energy in Gigawatt hours 9.0372 1.7604 IRENA
S Solar Energy in Gigawatt hours 6.6122 2.9789 IRENA
Y GDP per capita (constant 2010 US$) 2.2502 0.4212 WDI
P Population, total 18.2249 0.6536 WDI
I Patent application by residents 10.4275 1.5256 WDI
M Monetary policy (long-term interest rate annual %) 0.8812 0.8587 OECD
F Fiscal policy (Tax revenue % of GDP) 3.5133 0.1895 OECD

1157
C. Sun, A. Khan, Y. Liu et al. Renewable Energy 189 (2022) 1154e1165

Fig. 2. Presentation of data (Averaged on five years).

the coefficients of the population (P), real GDP (Y), Technological
innovations (I), monetary policy (M), and fiscal policy (F) to be
estimated. Similarly i; and t imply the crossectional groups (here
G7 countries) and study period (2000e2018). Finally, a0 ; and m is
the slope coefficient and regression residuals.
3.3. Econometric methods
The study comprised four distinct parts for formal analysis of the
data and to estimate the model given in Equation (4). The first part
of the research tests the variables for slope homogeneity and
crossectional dependence. The second part of the study determines
the level of integration between the variables. In the third part, we
tested the variables for equilibrium relationships. In the fourth part,
we tested the variables for possible cointegrating relations and the
robustness of those obtained results.
3.3.1. Crossectional dependence and panel slope homogeneity
In panel data schemes, considering the first-generation unit root
tests may supply biased and unreliable results if crossectional
dependence (PCD) and slope homogeneity (PSH) is overlooked [47].
Therefore, this study implements the crossectional dependence
test [48] to reduce biases due to crossectional correlations. Simi-
larly, the heterogeneous slopes in the panel data analysis are also a
problem identified by modern econometricians. Ignoring this
problem also may create the chances of biased and unreliable re-
sults (Khattak et al., 2020; Dong et al., 2018). Therefore, to reach
conclusive and unbiased results, we considered the slope homo-
geneity test on the data given by Ref. [50]. These tests (PCD & PSH)
perform on the null hypothesis of no crossectional dependence and
homogeneous slopes. The rejecting of the null hypothesis implies
crossectional correlation and heterogenous slopes, which may
create severe problems if unaddressed in the panel data structure.
1158
3.3.2. Tests of stationarity
As per the common econometric standards, we applied two
different stationarity tests for the order of integration and their
robustness. Initially, we adopted the crossectional IPS, introduced
by Pesaran [51], which can account for the PCD. Which incorporates
lagged crossectional mean and 1st differences as;
Dyit ¼ ai þ bi yit1 þ wi yit1 þ pi Dyi þ mit (5)
Similarly, Dyi ; and yit1 are means of the first difference, and
mean of level lags, while mit Indicates the error term of the
regression model. Based on the single crossectional “Augmented
Dickey-Fuller (ADF)” statistics, Pesaran [51] instrumented the
crossectional modified IPS (CIPS) to test the null hypothesis of non-
stationarity given in Equation (2) as;
N
X
CIPS ¼ N 1 ti ðN; TÞ (6)
t¼1
While ti ðN; TÞ is the t-statistics obtained from OLS regression 5,
and additionally, we considered the possible small sample bias
through CIPSstar as below;
N
X
CIPSstar ¼ N1 tistar ðN; TÞ (7)
t¼1
3.3.3. Panel cointegration tests
Observing the integration order between the variables, we
moved towards testing the cointegration between the modelled
variables. Simultaneously we deploy two distinct tests of cointe-
grations, including Westerlund [52] and Kao [53] residual-based
C. Sun, A. Khan, Y. Liu et al.
cointegration tests. First, we utilized the [52] cointegration test to
diagnose the cointegration relationship. Persyn & Westerlund [54]
have stated that Westerlund cointegration allows vast heteroge-
neity to analyze the equilibrium relationship between the selected
variables. In the current study, the advantage of using this test is
that it accounts for the possibility of crossectional dependence [52].
To run the cointegration regression, the following central regres-
sion equation is used;
pi
X X
yit ¼ai dt þ bi yit1þ ci xit1 þ bijD yitj þ
j¼1
While i; t and 2 indicates cross-sections, time, and regression
residuals. The null hypothesis adopted by this test suggests no-
cointegration against the alternative of the presence of a long-run
equilibrium relationship between the variables.
To the robustness of the results obtained from the Westerlund
[52] test, we again tested the given models for cointegration by
applying the Kao [53] test. The residual-based Kao [53] cointegra-
tion is used to diagnose the non-heterogenous equilibrium asso-
ciation. This test usually involves a number of ADF and DF
regression tests, which examines the null hypothesis of no coin-
tegration in the panel data sets. The rejection of the null hypothesis
indicates that the variables have a cointegration relationship. The
standard ADF test statistics can be calculated with the following
formula;
pffiffiffiffiffiffiffi
TADF þ 6N dbv=2d dov
ADF ¼ sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
c .
d2ov 2d d d
d2ov þ 3d2v 10 d2v
3.3.4. Long-run empirical results and robustness
In order to reach long-run results, we have deployed various
econometric approaches instead of employing a single estimation
algorithm due to; (i) to obtain the robust results, (ii) some of the
researchers believe that estimates from DOLS are robust, while
some of the researchers view that OLS/FMOLS are best and reliable
[4,55]. (iii) Some approaches overlook the problem of crossectional
dependence, missing observations, and the importance of balanced
and unbalanced panel data sets. Therefore, we deployed OLS,
FMOLS, DOLS, PMG-ARDL, and Driscoll & Kraay [56] estimators for
the results' long-run analysis.
Usually, panel OLS can be written as;
yit ¼ ∁i þ ∁t þ bit xit þ mit
In order to estimate the coefficients of FMOLS [57], adopted the
following test;
! " # The empirical analysis of the panel data begins with the inter-
  1 XT
Xit X i Xit  X i ðXit  X i Þ ðXit  X i Þ R*it  T R
2 b
t1
In the case of the panel dynamic-OLS (DOLS) [57], instrumented
the following equation of regression by adding lead and lag
dynamics.
pi
X first-generation unit-roots and other econometric tests that may
Rit ¼ ∁i þ bit xit þ ∅ip DXi;tl þ mit
l¼p
In addition, to estimate the coefficients of PMG-ARDL [58],
developed the following regression equation;
Renewable Energy 189 (2022) 1154e1165
p1
X q1
X
DRit ¼ ∅i þ vi Ri;t1 þ 4i qit1 þ t*ij DRi;tj þ w*ij Dqi;tj þ εit
l1 l0
(13)
Here, v it implies the coefficient of error correction term, 4 indicates
the long-term coefficients.
Finally, we deployed an estimator proposed by Driscoll & Kraay
pi [56] to estimate the models with robust standard errors, calibrated
yij Dxitjþ 2it (8) with crossectional dependent data. As given reasons by Hoechle
j¼qi [59] that erroneously neglecting the PCD may mislead the conclu-
sions, this approach best fits the data with crossectional depen-
dence and panel heterogeneity with robust standard errors.
Similarly, its estimates are equally reliable for unbalanced and
balanced data sets, data with missing observations, account for
spatial and serial dependency and are equally feasible in hetero-
scedasticity [60,61]. Driscoll & Kraay estimator is a non-parametric
approach and is flexible in large T dimensions. Based on the given
advantages, the study used DK estimator in the OLS framework in a
linear model shown as;
yit ¼ bit xit þ mit (14)
½tð2000  2018Þ ¼ 1; 2; 3; ……; T; iðG7Þ ¼ 1; 2; 3; ……; N
Where y is the dependent variable (indicators of renewable en-
ergy), and x contains a set of explanatory variables taken in the
current study. Further, m, b are the regression residual, and co-
(9) efficients of the explanatory variables to be estimated.
3.3.5. Granger non-causality
Identifying the short and long-run associations between the
variables is the main objective of an empirical study. However,
short-run causal examinations are also getting attention [47,49].
There is a disadvantage of cointegrating relationships in that they
cannot offer causal directions. Therefore, we have addressed this
limitation by employing the Granger non-causality test [62] for
crossectional dependent panel data. This test allows parameter
coefficients to be changed across cross-sections and exhibits more
reliable and unbiased results in crossectional dependent reason-
ably small panel data sets [63]. The test is applied to the panel data
in either case (N > T or N < T) by adopting the null hypothesis that
no homogenous causality exists in the cross-sections. However, the
alternative hypothesis ensures that there is no less than one caul
loop in the given data.
To the best explanation of the estimation procedures, we have
summarized the estimation steps and given in Fig. 3 for easy
(10) understanding.
4. Empirical results
(11) dependency of variables within cross-sections. Table 2 indicates
ei
that the variables in each cross-section are strongly interrelated,
given by the Pesaran (2004) PCD test (Panel-A). Similarly, the sec-
ond panel (Panel-B) of results in Table 2 imply that consistent
heterogeneity exists across the four tested models for the given
variables. The existence of panel heterogeneity and strong cross-
ectional dependence in the cross-sections guide us to applying
(12)
mislead and guide us to inefficient and biased conclusions [63,64].
Therefore, we adopted recent econometric algorithms, which
handle crossectional dependence, and panel heterogeneity to give
robust policy implications.
1159
C. Sun, A. Khan, Y. Liu et al. Renewable Energy 189 (2022) 1154e1165

Fig. 3. Estimation procedures.

Table 2
PCD, and PSH results.

Variables CD test Probability values Slope Homogeneity test Delta Adj Delta

Panel- A Panel- B
– e e Total renewable energy model
R 17.95 0.00 Statistics 4.52 5.94
H 0.36 0.72 Probability values 0.00 0.00
W 19.19 0.00 Hydro energy model
S 18.47 0.00 Statistics 0.56 0.73
Y 10.4 0.00 Probability values 0.58 0.46
P 6.09 0.00 Wind energy model
I 1.25 0.21 Statistics 3.49 4.58
M 17.16 0.00 Probability values 0.00 0.00
F 6.64 0.00 Solar energy model
– – – Statistics 5.98 7.86
– – – Probability values 0.00 0.00

To analyze the variables' stationarity properties, based on the approaches; the first is Westerlund [52] cointegration, and the
recommendations from PCD and PSH results, we applied both panel second is residual-based Kao [53]. Cointegration results exhibited
CIPS and CADF tests of unit roots. Results in Table 3 imply that the in Table 4 based on Westerlund (2008) cointegration shows the
variables are non-stationary at levels, providing that we cannot rejection of the null hypothesis of non-cointegration at the level of
reject the null hypothesis of unit roots. After converting to the first 1%. The significant p-values of the Westerlund test supported the
difference, all the variables turned stationary, indicating the existence of a cointegration relationship between the dependent
acceptance of the alternative hypothesis. and independent variables for all four models. Likewise, the results
The information obtained from the unit root analysis has guided obtained from Kao (1999) supported the results of Westerlund
us to determine the long-run equilibrium relationship between the (2008) cointegration by indicating that the models (R-model, H-
modelled variables. We applied two distinct cointegration model, W-model, and S-model) have a cointegration relationship
with monetary and fiscal policies, and other macroeconomic vari-
ables considered in the study.
Table 3
Based on the findings from the cointegration analysis, we tested
Panel unit root results.
the variables to determine the long-term relationship by applying
Variables CIPSlevel CIPSdiff CADFlevel Probability CADFdiff Probability OLS, DOLS, FMOLS, PMG-ARDL, and finally DK estimators. The
R 2.174 4.407a 1.634 0.598 2.438b 0.035 summary of results for total renewable energy (R-model) is
H 1.236 4.776a 2.798 0.087 3.128b 0.013 exhibited in Table 5 and Fig. 4, which depicts these obtained results
W 0.616 3.42a 1.524 0.701 2.307c 0.069 at a glance for readers to understand easily. The empirical outcomes
S 0.619 3.833a 0.414 1.000 4.011a 0.000
Y 1.431 2.945a 1.362 0.828 2.945a 0.001
obtained from OLS, DOLS, FMOLS, PMG-ARDL, and finally DK
P 1.08 3.160a 0.897 0.984 3.026a 0.000 indicate that a one per cent expansionary monetary policy tends to
I 1.804 3.943a 1.458 0.758 2.713a 0.006 reduce the renewable energy generation in G7
M 1.301 2.832a 2.164 0.132 3.044a 0.000 with 0.34, 0.291, 0.398, 0.244, 0.55% in the long run. The
F 1.968 4.201a 1.48 0.740 3.985a 0.000
reason for declining the investment in renewable energy genera-
Note: Superscripts c,b, and a shows the significance at 10%, 5%, and 1%; tion is based on the principals that investment in the renewable
while, 2.21, 2.34, and 2.6 are the critical values for CIPS at 10%, 5%, and 1% energy sector has huge risks involved compared to other energies,
levels.

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Table 4
Cointegration analysis.

Westerlund (2008) Cointegration Ga Gt Pa Pt

Renewable energy model 1.992a 2.193a 2.016a 5.134a

Hydro energy model 0.766 1.632b 1.006 3.791b
Wind energy model 2.542b 1.361c 2.184b 3.153b
Solar energy model 1.090a 0.662a 0.219a 0.910a
Kao (1999) Cointegration MDF test DF test ADF test UMDF test UDF test
Renewable energy model 7.94a 10.25a 5.283a 12.516a 11.042a
Hydro energy model 5.50a 7.890a 5.276a 11.073a 9.294a
Wind energy model 1.41c 3.370a 1.582b 0.939 3.194a
Solar energy model 1.602c 1.657b 1.814b 2.368a 1.994b

Note: Modified Dickey-Fuller (MDF), Dickey-Fuller (DF), Augmented Dickey-Fuller (ADF), Unadjusted Modified Dickey-Fuller (UMDF), and Unadjusted Dickey-Fuller (UDF).
Similarly, Superscripts c,b, and a show significance at 10%, 5%, and 1% levels.

Table 5 improvements in renewable energy generation with almost 1.178,

Renewable energy model (R-Model). 1.212, 1.171, 1.699, and 2.010% simultaneously with each econo-
Variables OLS DOLS FMOLS PMG DK metric approach. These results are not unique and are supported by
various previous studies [65]. At the same time, these results con-
LY 1.1781a 1.2119a 1.1709a 1.6998a 2.0101a
LF 1.2372a 1.4840a 1.2246a 1.1612a 1.2796a
tradicted the results of Khan et al. [66], and SJ et al., [67]. They have
LM 0.3999a 0.2908a 0.3980a 0.2439a 0.5536a reported that the essential purpose lies in improving each country's
LI 0.6739a 0.7747a 0.6826a 1.2288a 0.4916a economic pace and activities, which need enormous energy con-
LP 0.9788a 1.0698a 0.9848a 1.3134c 1.1600a sumption. Due to the low cost of fossil-based energy, poor countries
R-squared 0.4465 0.4296 0.4458
primarily focus on traditional energy consumption to meet their
ECT 0.1450a
Wald (c2) 2855.29a people's needs. Secondly, surprisingly, the role of innovations in
c,b, a
renewable energy generation is yet not supported positively, which
Note: Superscripts and show significance at 10%, 5%, and 1% level.
is in line with the study of Alam & Murad [68], who believed that
the negative response of technological innovations is a response
due to trade openness and technological progress in OECD coun-
tries. In comparison, the study of Khan et al. [66], disclosed that the
negative response of technological innovations to renewable en-
ergy generation is because innovations are not entirely directed
towards the renewable energy sector.
While the population growth positively supports the renewable
energy generation of the G7 countries. It implies that with a one per
cent growth in the population of the G7 countries, renewable en-
ergy generation tends to increase with 0.979, 1.069, 0.985, 1.314,
and 1.600 for OLS, DOLS, FMOLS, PMG-ARDL, and DK approaches.
The significance of this positive relationship between the two
variables is summarized in the study Akintande et al., [69], who
suggested that increasing population growth raises renewable en-
ergy consumption. Furthermore, negating this phenomenon, Vo &
Vo [70] stated that moderating population and extending renew-
able energy is crucial to sustainable development. Similarly, the
study Vo & Vo [70] further argued that the response of population
growth to renewable energy is negative and reasoned that popu-
lation growth is an essential indicator of environmental degrada-
Fig. 4. Summary of findings.
tion in line with the standard STIRPAT model. Finally, there are
some heterogeneities in coefficients estimated with different ap-
which makes the monetary policy highly responsive towards it. proaches, which may be due to the reasons of slope heterogene-
Monetary policy may raise the initial investment cost, which tends ities, crossectional dependencies, and orders of integration across
to decline the opportunity to obtain credit by the investors of the modelled variables. However, the signs of the variables are
renewable energy. Similarly, the fiscal expansionary policy results similar, which impose no severe restrictions on proposing proper
imply that a one per cent increase in the expansion of the tax policy guidelines for these countries.
revenue raises the ratio of renewable energy generation at 1.24, Turning towards the hydro energy generation model (H-model)
1.48, 1.22, 1.16, and 1.28% in the long run. The result indicated that given in Table 6, we have explored that the role of expansionary
expansionary fiscal policy has a significant and positive impact on monetary policy is negative and significant, which imply that a one
renewable energy generation in the G7 countries. This means that per cent rise in the expansionary monetary policy tends to
the governments in a group of seven are interested in transitioning discourage the investors in hydroelectric energy generation
from traditional to non-traditional sources of energy generation, with 0.069, 0.123, 0.094, 0.244, and 0.3050 for each esti-
which is an active and helpful source to achieve the balanced and mator. Conversely, the role of expansionary fiscal policy has
sustainable development of the countries. Likewise, the role of reciprocal impacts. For example, a one per cent rise in the expan-
economic growth on renewable energy generation in these coun- sionary fiscal policy tends to encourage the investors in renewable
tries is positive and significant. This indicates that a one per cent energy generation with 3.425, 4.512, 3.425, 4.161, and 3.255% in the
rise in the real GDP of the G7 countries tends to raise the long run. Similar to the total renewable energy model, the results

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Table 6 Table 9
Hydro energy model (H-Model). Pairwise Dumitrescu-Hurlin Causality test.

Variables OLS DOLS FMOLS PMG DK Null Hypothesis: WStat. Zbar-stat. Prob. Causal direction

LY 1.8776a 1.9271a 1.8888a 1.6998a 2.0210a LY does not cause LR 6.70a 3.87 0.00 LY4LR
LF 3.4251a 4.5123 3.4250a 4.1612a 3.2550a LR does not cause LY 7.18a 4.31 0.00
LM 0.0696 0.1229a 0.0941a 0.2439a 0.3050c LF does not cause LR 3.52 1.01 0.31 LR/LF
LI 0.4355b 0.7091a 0.4515a 4.2288a 0.1550c LR does not cause LF 5.63a 2.91 0.00
LP 0.4143b 0.7752b 0.4083a 0.3134b 0.6490a LM does not cause LR 1.78 0.56 0.57 LR/LM
R-squared 0.7981 0.7981 0.7857 LR does not cause LM 5.16b 2.46 0.01
a
ECT 0.1217 LI does not cause LR 3.33 0.67 0.51 LI s LR
Wald (c2) 613.78a LR does not cause LI 2.06 0.33 0.74
c,b, a LP does not cause LR 4.70b 2.07 0.04 LP/LR
Note: Superscripts and show significance at 10%, 5%, and 1% levels.
LR does not cause LP 1.90 0.45 0.65
LH does not cause LF 1.80 0.54 0.59 LF/LH
LF does not cause LH 5.06b 2.40 0.02
Table 7 LS does not cause LF 13.96a 10.40 0.00 LS/LF
Wind energy model (W-Model). LF does not cause LS 3.76 1.22 0.22
LW does not cause LF 6.95a 4.09 0.00 LW/LF
Variables OLS DOLS FMOLS PMG DK
LF does not cause LW 3.71 1.18 0.24
LY 2.6106a 2.8702a 2.6884a 5.0754b 2.2128a LM does not cause LH 2.10 0.27 0.79 LH s LM
LF 2.8061a 2.4779a 2.7268a 1.8475a 1.6302a LS does not cause LM 5.76a 3.00 0.00 LS/LM
LM 1.1225a 1.4347a 1.1044a 0.2331a 0.9516a LM does not cause LS 3.23 0.74 0.46
LI 1.5533a 2.0527a 1.5765a 1.5049a 2.0537a LW does not cause LM 5.36b 2.64 0.01 LW/LM
LP 3.5049a 4.2648a 3.5570a 0.2041a 4.9318a LM does not cause LW 3.14 0.65 0.51
R-squared 0.2785 0.2785 0.2414
Note: Superscripts c,b, and a show significance at 10%, 5%, and 1% levels. Where, 4, /,
ECT 0.1146b
s corresponds to bidirectional, unidirectional, and no causality between the variables.
Wald (c2) 164.94a
c,b, a
Note: Superscripts and show significance at 10%, 5%, and 1% levels.
population growth is again positive and significant for all the
models. This implies that the G7 countries are yet reluctant towards
imply that the role of monetary policy in the hydro energy model
fossil-based energy and care more about environmental safety;
negatively impacts hydroelectricity generation. The negative
therefore, they want to invest more in the renewable energy sector.
response of monetary policy towards hydroelectricity generation
The role of monetary and fiscal policies variables is significant,
indicates that the costs associated with renewable energy are very
however negatively responding. This relationship exerts that the
high, and easy transforming from nonrenewable to renewable en-
expansionary monetary and fiscal policies are not helping increase
ergy may not be an easy task; therefore, investors would be
the wind energy generation in the G7 economies. However, the
reluctant to obtain loans at high rates and invest in the generation
world is turning towards wind energy generation, which requires
of the renewable energy. In contrast, real income and population
massive investment in this sector. The monetary and fiscal policy
support the level of energy generation in the G7 countries. It is
coefficients are negative with significant explanatory power,
indicated that a one per cent increase in real per capita tends to
implying that a one per cent rise in the fiscal and monetary policy
raise the hydro energy generation with 1.877, 1.927, 1.888, 1.699,
tends to decline investors' faith in renewable energy generation
and 2.021% simultaneously. At the same time, in the case of the
with 4.630, and 0.9516% with DK estimator for the long run.
population growth, its explanatory power was positive with 0.414,
Similar to all previous models, the role of innovations in the current
0.772, 0.4083, 0.313, and 0.649% with OLS, DOLS, FMOLS, PMG-
model is also negative, thus indicating the innovations in energy
ARDL, and DK estimators. Finally, the impact of innovations does
efficiency rather than renewable energy generation. Finally, Table 8
not positively support hydro energy generation, while its explan-
sheds light on the results obtained for the solar energy model (S-
atory power is negative for all models with almost similar magni-
Model). The empirical results obtained from various econometric
tudes. Such a relationship indicates that the investors in G7
estimators discussed above are similar in direction and magnitude
countries are not investing in hydro energy generation due to
with the W-Model (Table 7), which discloses identical arguments.
maintenance's high and recurring costs. Instead, their investment is
Therefore, we intentionally omitted the reflection on the obtained
highly motivated to be on energy efficiency and new energy-
results for the wind energy model. The coefficients' sizes indicate
efficient technologies in the long run.
that both fiscal and monetary policy in each of the two models (W-
Going towards the wind energy generation given in Table 7, we
Model, and S-Model) have a high tendency of responsiveness to-
found that income is negative and significant in all the models,
wards the renewable energy generation in G7 countries. While
which signals that a percentage rise in economic growth reduces
devising policies, these countries must incorporate these ten-
the wind energy generation in the G7 countries. Similarly,
dencies into their long-term policies.
We deployed panel Granger causality to analyze the causal di-
Table 8 mensions between the series. The selected results from the cau-
Solar energy model (S-Model). sality test given in Table 9 validates the results by confirming the
Variables OLS DOLS FMOLS PMG DK causal links between various variables. As shown in the last column
a a a b
of Table 9, several causal directions have been revealed. There
LY 3.8385 2.9937 3.9227 2.0754 0.1393a
LF 0.4470c 1.3134b 0.3708a 1.8475a 1.2542a
found the bidirectional links between real GDP and renewable
LM 2.5662a 2.3107a 2.5630a 0.2331a 2.350a energy generation. The results reported the unidirectional causality
LI 1.0925a 1.0356b 1.1115a 1.5048a 0.9701a from renewable energy towards fiscal and monetary policy in-
LP 3.4437a 3.0714a 3.4929a 0.2040 3.5346a dicators. The causal dimensions between innovations and renew-
R-squared 0.5167 0.5081 0.5117
able energy are not identified, while the results reported the
ECT 0.1145b
Wald (c2) 886.91a causality run from population to renewable energy generation in
c,b, a
the G7 countries. Furthermore, the fiscal policy variable is causing
Note: Superscripts and show significance at 10%, 5%, and 1% levels.

1162
C. Sun, A. Khan, Y. Liu et al.
the hydro energy, while the wind and solar energy are causing the
fiscal policy indicator in the short run. We found a one-direction
causal run from wind and solar energy variables to monetary pol-
icy indicators. Along similar lines, we have found no causal linkage
between the hydro and monetary policy indicators.
5. Conclusions and policy implications
The primary purpose of this research was to inspect the plau-
sible economic linkages between the expansionary and contrac-
tionary fiscal and monetary policies and the disaggregated
renewable energy generation in a set of G7 countries, in a consort of
some controlled variables. The PCD and PSH results have rejected
the null hypothesis of crossectional independence and panel ho-
mogeneity. Further, the application of Westerlund and Kao's coin-
tegration tests supported the cointegration relationship between
the modelled variables. According to the empirical estimates
derived from “OLS, DOLS, FMOLS, PMG-ARDL, and DK,” the
expansionary fiscal policy increases the investment in renewable
energy generation at an aggregated and disaggregated level. Simi-
larly, the expansionary monetary policy has revealed that it reduces
the investment in renewable energy generation. Furthermore, the
economic and population growth results are reliable and positively
impact renewable energy generation in G7 countries. Our results do
not support the innovations that led to renewable energy genera-
tion for the selected countries; instead, the increase in patent ap-
plications has reduced renewable energy generation investment.
Finally, we explored the causal linkages between the variables
and found that unilateral causality runs from renewable energy at
aggregated level variable to fiscal policy. Similarly, renewable en-
ergy generation causes monetary policy indicators unidirectionally.
Further, we tested the causality between the variables at a dis-
aggregated level; the results imply that the fiscal policy indicator is
causing the hydro energy variable in the short run; however, no
response was reported between monetary policy and hydro energy
variable. Similarly, the results supported the unidirectional causal
linkages from wind energy to fiscal and monetary policy indicators.
Likewise, the short-run Granger causality results reported the one-
way causal response from solar energy to monetary and fiscal
policy indicators for the G7 countries.
From the results mentioned above, the following apropos pol-
icies are inferred. Firstly, we propose to authorities to develop
green monetary and fiscal policies for G7 countries. It has been
observed that despite the strong potential of fiscal policy in driving
a green economy, governments have not exploited this potential as
much as they could. In many countries, fiscal and monetary policy
tools to meet environmental objectives have been somewhat
limited [71]. Therefore, while designing environmental policies, the
governments must incorporate the monetary and fiscal policies to
reap the best possible advantages to sustain the environment.
Similarly, we propose to impose those taxes on pollution agents,
and the revenue obtained would be allocated towards investment
in renewable energy generation projects of these countries. Sec-
ondly, this study proposes to the G7 countries that stable monetary
policy is required to improve renewable energy generation and
reduce toxic elements to the environment. In addition, on the
government regulation side, it is required by the government
agencies to approve, monitor, and manage renewable energy pro-
duction scales at central levels [72]. Government sector bodies
should encourage investors and companies to generate renewable
energy. Further, priorities should be, and targets should be set to
generate renewable energy in the planning process and provide
instruction to buy the renewable energy generated in their
respective regions/economies. Finally, the reasons lie in the
adjustment of monetary policy that may bring new investment in
1163
Renewable Energy 189 (2022) 1154e1165
renewable energy generation [73], which is the basis of sustainable
economic development by understanding the horizon of the time
and the role of monetary policy on renewable energy generation in
G7 countries. Further, investment in technological innovations
must be improved, thus shifting from energy efficiency towards
renewable energy generation in the long run.
The current research has some limitations, which will help to
open several avenues for future research. Firstly, the present study
aimed to engage the G7 countries; further studies may apply a
similar approach to other countries, including BRICS, BRI, and
newly industrialized countries expecting to divulge unique and
novel anomalies. Secondly, the current study adopted monetary
and fiscal policy variables to see the impact on renewable energy
generations; future research must add other possible indicators of
renewable energy generation (e.g., financial development, global-
ization, governance) for timely and updated policy interventions
for a greener world. Finally, the study adopted symmetric ap-
proaches, while asymmetries in macroeconomics cannot be
ignored; therefore, it is suggested to adopt the asymmetric and
threshold procedures to model the variables and find added
explanatory powers expected to present more detailed results.
CRediT authorship contribution statement
Chuanwang Sun: conceived and designed the study. Anwar
Khan: provided the data, Writing e original draft, wrote, Formal
analysis, revised and analyzed the results, All authors read and
approved the manuscript. Yongzhe Liu: provided the data, Writing
e original draft, wrote, Formal analysis, revised and analyzed the
results, All authors read and approved the manuscript. Ni Lei:
conceived and designed the study.
Declaration of competing interest
The authors declare that they have no known competing
financial interests or personal relationships that could have
appeared to influence the work reported in this paper.
Acknowledgement
The authors wish to express their sincere gratitude to the Major
Program of the National Fund of Philosophy and Social Science of
China (No. 21&ZD109).
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