The Mitigating Effect of Governance Quality on the Finance-Renewable Energy-Growth Nexus : Some International Evidence

This study analyzes the conditional effect of governance quality on the dynamics between financial development, renewable energy consumption, and economic growth in 123 countries from 1990 to 2017. We built composite indexes of financial development and governance quality through the principal component analysis (PCA) by using several financial variables and governance indicators. We employ the generalized method of moments (GMM) and the two-stage least squares (2SLS) techniques, but also the Granger non-causality in Dumitrescu and Hurlin (2012). First, the disaggregated analysis shows that renewable energy consumption,financial inclusion, financial efficiency, and financial stability have positive marginal effects on economic growth under a good governance quality, except for financial depth. These results differ across countries with different income levels. Second, the aggregated analysis confirms the positive marginal impact of financial development on growth only in low-income economies, whereas renewable energy consumption has positive marginal effects only in lower-middle-income and upper-middle-income economies. Finally, in most cases, the feedback hypothesisis confirmed between financial development and growth in all countries. Similarly, the bidirectional causality between renewable energy consumption and growth is also confirmed in lower-middle-income and low-income countries, exceptforhigh-income and upper-middle-income economies. Overall, governance quality has a threshold effect on the finance-renewable energy-growth nexus, which varies across countries. Thus, financial development and good governance quality are complementary driving forces for growth in most countries, except in upper-middle-income countries, whereas the complementary effect between renewable energy consumption and governance quality holds only in low-income and high-income countries. Accordingly, our study suggests more improvements in the governance quality in these countries, especially in the low-income and high-income countries to enhance the marginal impacts of financial development and renewable energy consumption on growth