Renewable Energy Consumption, Financial Development, and Economic Growth Nexus: Novel Evidence from a Panel Quantile ARDL Model

This paper investigates the relationship between renewable energy consumption, financial development and economic growth for 45 developing and developed countries between 1995 and 2023, focusing on the heterogeneous nature of this relationship. A unique feature of this study is the use of the Panel Quantile Autoregressive Distributed Lag (PQARDL) method to account for the distributional heterogeneities in the growth–energy–finance nexus within various quantiles of the conditional growth distribution. The empirical findings show that the consumption of renewable energy fuels is statistically significantly positively correlated with economic growth, especially at the higher quantiles, highlighting that a transition to renewable energy has a disproportionate impact on economic growth for countries with higher levels of baseline economic growth. The positive effect is multiplied by financial development: better allocation of capital towards green investment projects. The results also corroborate a long-run cointegrating relationship between the variables based on the Westerlund cointegration test. The estimators are robust against cross-sectional dependence (CCEMG and Augmented Mean Group (AMG) approaches). The Dumitrescu–Hurlin causality test shows that there is bidirectional causality between renewable energy and growth and one-way causality from financial development to growth and renewable energy consumption. The implications for policy makers for developing countries who intend to pursue pathways towards energy transition and financial sector deepening for continued long-term economic growth are important.