Do Renewables Shield Inflation from Fossil Fuel-Price Fluctuations?

Laurent Millischer, Chenxu Fu, Ulrich Volz and John Beirne

No 2024/111, IMF Working Papers from International Monetary Fund

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.

Keywords: Inflation; Renewable Energy; Energy Prices; Oil Price; Monetary Policy; inflation volatility; inflation dynamics; energy inflation; inflation expectation; share of renewable; inflation sensitivity; electricity price inflation; Energy pricing; Fuel prices; Consumption; Global (search for similar items in EconPapers)
Pages: 46
Date: 2024-05-31
New Economics Papers: this item is included in nep-ene, nep-env and nep-mon
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